Public Storage Annual Report 1997

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FY1997 Annual Report · Public Storage

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Public Storage, Inc.
1997 Annual Report

D r i v e n

b y

V i s i o n

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Public Storage, Inc. and The System

Public Storage, Inc. is a fully integrated, self-administered and self-managed real estate investment trust that primarily acquires,
develops, owns and operates self-storage facilities. The Company’s properties are located in 38 states. At December 31, 1997, the
Company owned interests in 1,136 properties, of which 1,073 were self-storage facilities or facilities that combined both self-storage
and commercial space for rent and 63 were commercial properties.

The Public Storage System is a national infrastructure operated by thousands of people. The system is designed to respond effi-
ciently to the needs of its 550,000 customers. The system also encompasses subsidiaries operating portable self-storage, truck rentals
and retail stores.

Location

Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Nebraska
Nevada
New Hampshire
New Jersey
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Totals

Number of Properties

Net Rentable Square Feet

Number of Spaces

Self-Storage(1)

Commercial(2)

Self-Storage(1)

Commercial(2)

Self-Storage(1)

Commercial(2)

15
10
–
278
37
13
4
98
36
4
65
14
15
4
7
32
10
12
6
18
1
22
2
35
29
10
27
8
25
18
2
2
10
122
6
33
36
7
1,073

–
4
1
31
–
–
–
–
–
–
–
–
1
–
–
3
–
–
–
–
–
–
–
–
–
–
–
2
2
–
–
–
2
8
–
8
1
–
63

569,000
672,000
–
16,615,000
2,329,000
710,000
229,000
5,705,000
1,957,000
197,000
4,074,000
799,000
881,000
213,000
476,000
1,802,000
580,000
694,000
341,000
954,000
46,000
1,409,000
123,000
2,018,000
1,692,000
569,000
1,650,000
430,000
1,171,000
1,224,000
64,000
81,000
647,000
8,029,000
358,000
2,040,000
2,226,000
450,000
64,024,000

–
370,000
90,000
3,974,000
–
–
–
–
–
–
–
–
62,000
–
–
419,000
–
–
–
–
–
–
–
–
–
–
–
144,000
102,000
–
–
–
136,000
843,000
–
712,000
28,000
–
6,880,000

5,213
5,571
–
166,000
19,623
6,683
2,532
56,987
17,509
3,043
41,621
6,763
6,549
1,755
4,932
18,742
5,876
6,078
3,138
8,629
390
13,351
1,041
18,915
19,000
4,610
13,936
3,582
11,413
12,339
689
736
5,210
70,399
2,825
18,714
22,526
3,718
610,638

–
116
171
1,390
–
–
–
–
–
–
–
–
40
–
–
75
–
–
–
–
–
–
–
–
–
–
–
298
64
–
–
–
58
380
–
398
23
–
3,013

(1) Self-storage and properties combining self-storage and commercial space.
(2) Primarily business parks.

(In thousands, except per share data)
For the year ended December 31,

Revenues:

Rental income
Equity in earnings of real estate entities
Facility management fees
Interest and other income

Expenses:

Cost of operations
Cost of facility management
Depreciation and amortization
General and administrative
Interest expense
Environmental cost
Advisory fee

Income before minority interest
Minority interest in income
Net income

Per Common Share(2):

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Selected Financial Highlights

1997(1)

1996(1)

1995(1)

1994

1993

$ 434,008
17,569
10,141
9,126
470,844

$ 294,426
22,121
14,428
7,976
338,951

$ 202,134
3,763
2,144
4,509
212,550

174,186
1,793
91,356
6,384
6,792
—
—
280,511
190,333
(11,684)
$ 178,649

94,491
2,575
64,967
5,524
8,482
—
—
176,039
162,912
(9,363)
$ 153,549

$ 141,845
764
—
4,587
147,196

52,816
—
28,274
2,631
6,893
—
4,983
95,597
51,599
(9,481)
$ 42,118

$ 109,203
563
—
4,914
114,680

42,116
—
24,998
2,541
6,079
—
3,619
79,353
35,327
(7,291)
$ 28,036

$0.85
$1.05
$1.05
23,978
24,077

$0.84
$0.98
$0.98
17,483
17,558

72,247
352
40,760
3,982
8,508
2,741
6,437
135,027
77,523
(7,137)
70,386

$0.88
$0.96
$0.95
41,039
41,171

Distributions
Net income – Basic
Net income – Diluted
Weighted average common shares — Basic
Weighted average common shares — Diluted

$0.88
$0.92
$0.91
98,446
98,961

$0.88
$1.10
$1.10
77,117
77,358

Balance Sheet Data:
Total assets
Total debt
Minority interest
Shareholders’ equity

$3,311,645
$ 103,558
$ 288,479
$2,848,960

$2,572,152
$ 108,443
$ 116,805
$2,305,437

$1,937,461
$ 158,052
$ 112,373
$1,634,503

$ 820,309
$ 77,235
$ 141,227
$ 587,786

$ 666,133
$ 84,076
$ 193,712
$ 376,066

Other Data:
Net cash provided by operating activities

$ 293,163

$ 245,329

$ 123,579

$ 79,180

$ 59,477

Net cash used in investing activities

$ (408,313)

$ (479,626)

$ (248,672)

$(169,590)

$(137,429)

Net cash provided by financing activities

$ 129,749

$ 180,717

$ 185,378

$ 100,029

$ 80,100

Funds from operations (3)

$ 272,234

$ 224,476

$ 105,199

$ 56,143

$ 35,830

1. During 1997, 1996 and 1995 the Company completed several significant business combinations and equity transactions. See Notes 3 and 10 to the Company’s

consolidated financial statements.

2. The net income per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of net income per share and the impact of Statement No. 128, see Note 2 to the Company’s consolidated financial statements.
3. Funds from operations (“FFO”), means net income (loss) (computed in accordance with GAAP) before (i) gain (loss) on early extinguishment of debt, (ii) minority
interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization (including the Company’s pro-rata
share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in the PSMI Merger, including property management
agreements and excess purchase cost over net assets acquired), and (ii) less FFO attributable to minority interest. FFO is a supplemental performance measure
for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). The NAREIT definition does not specifically address
the treatment of minority interest in the determination of FFO or the treatment of the amortization of property management agreements and excess purchase
cost over net assets acquired. In the case of the Company, FFO represents amounts attributable to its shareholders after deducting amounts attributable to the
minority interests and before deductions for the amortization of property management agreements and excess purchase cost over net assets acquired. FFO is
presented because many analysts consider FFO to be one measure of the performance of the Company and it is used in certain aspects of the terms of the Class
B Common Stock. FFO does not take into consideration scheduled principal payments on debt, capital improvements distributions and other obligations of the
Company. Accordingly, FFO is not a substitute for the Company’s cash flow or net income as a measure of the Company’s liquidity or operating performance or
ability to pay distributions.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

To Our

Shareholders

Self-storage companies come in different sizes. The

vision required to lead a local or regional business is
totally different than the vision required at the national

level. Public Storage became a nationwide enterprise by imple-
menting a powerful vision. The vision is to be The First Choice.
To us, being The First Choice means that customers
considering self-storage turn to us first, want us to meet their
storage needs. One of our goals is to build value in our
reputation as well as in our trade name. We believe we have
a reputation for innovation and flexibility, helping us attract
quality personnel, reflected in our employees throughout our
Company. Furthermore, to the investment community being
The First Choice means we are first among our self-storage
real estate investment trust competitors. One of the nation’s
leading financial investment firms recently selected our
Company as its Top REIT Pick for 1998.

Our vision of being The First Choice makes customer

satisfaction a priority. We seek to create a desire in our cus-
tomers to use our services and to tell their friends about us.
We market our business through customer loyalty. Word-of-
mouth advertising is often recognized as the best form of
advertising available, a by-product of striving for customer
satisfaction all the time. A vision is inconsequential without
clear, achievable strategies to realize it. Five distinct perfor-
mance strategies energize our vision: Leadership, low long-
term capital costs, low self-storage operating costs,
diversified operations and successful risk management.

Self-Storage Industry: Positioned for Growth

Changing Demographics

Population Mobility

Demand for Goods

Economic Activity

1960

1980

2000

2020

The Public Storage Property System

36 (1)

25 (2)

278
(31)

10 (4)

10
2
13
35
4
32 (3)

10 (2)

15 (1)

8 (2)

122 (8)

(1)

33 (8)

Self-Storage Facilities=1,073; Business Parks=63 • Figures in Parentheses Denote Business Parks

In the Right Gear

We believe we have the vision and performance strategies to
support continued expansion in a competitive and dynamic
industry. To maintain industry leadership, we plan to con-
tinue to strengthen the quality and clarity of our vision and
strategies. Although the future has never seemed brighter,
we know that real estate activity flows in cycles. Markets
experience downturns. The relationship between supply and
demand changes. These pressures are magnified by continued
self-storage development and industry consolidation, the
defining trends in the industry today. An overgrowth of self-
storage in a given market could have deleterious effects on
occupancy levels and rental rates in that market. As the
larger owners of self-storage continue to dominate acquisition
and development activities, the competitive landscape
becomes more challenging. These operators can be expected
to use professional management and media advertising,
economies of scale, management efficiencies, quality control,
etc. to improve performance. We remain confident that our
vision and five performance strategies will continue to make
us The First Choice.

As is true in most segments of the real estate industry

in the United States today, the self-storage sector is fragmented.
We estimate the industry is comprised of over 26,000 self-
storage properties, most of which are owned by independent
local operators. We own interests in 1,073 self-storage
properties, making us the largest single self-storage owner
and operator in the country. We have an intensive property
development strategy and strong balance sheet, fundamentals

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

advancing our real estate program. There were about 105 mil-
lion American households in 1997. Assuming a 10 percent
utilization rate, we estimate that at any given point in time
approximately 10 million American households are renting
self-storage space. That means that 95 million American
households are not renting a self-storage unit. This reflects
the dimensions of the prospective market for the self-storage
industry and for Public Storage in particular.

The Road Ahead

We believe our industry, and specifically our Company, is
positioned for growth. The economic and social influences
that drive demand in the self-storage industry are strong.
These influences, along with our position as the largest oper-
ator in the industry and our substantial market penetration,
resulted in strong occupancies and realized rents in 1997 for
our Company. Revenues and net operating income advanced
on a Same Store basis for the year ended December 31, 1997
compared to the previous year.

We believe we have the right vision and strategies to

respond to the opportunities and challenges in our industry
today. Our operating business and financial position give
us the capability to generate rising cash flow and provides us
with the opportunity to reinvest a substantial portion of that
cash. Our strengths enhance the growth of portable self-
storage, retail stores and truck rentals. Our vision and strate-
gies should continue to differentiate us from our competitors
and provide advantages in the future. We thank our share-
holders, employees and customers for supporting our vision.

Sincerely,

B. Wayne Hughes
Chairman of the Board
and Chief Executive Officer

Harvey Lenkin
President

March 31, 1998

Our properties are located in almost every major metropolitan area of the
United States. This property is in Atlanta, Georgia.

The Marine Corps’
50th Anniversary
Toys for Tots pro-
gram provided an
opportunity to help
brighten the holi-
days for deserving
young people last
year. The Toys for
Tots program used
modified Pak &
StoreTM self-storage
containers for holi-
day toy collection
outside selected
Target Stores.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Leadership Strategy—

Implementing Our Vision

To be The First Choice requires our management team to

formulate the appropriate responses, system-wide or
incremental, to keep the Public Storage system finely

tuned for maximum competitive efficiency. In addition to being
familiar with our markets, this requires us to be aware of our
property management processes and our philosophy about
those processes. Our objective of maintaining self-storage industry
leadership has not changed. What we see more clearly are the
many resources available to us within the Public Storage system
to achieve our vision. We are referring to our human resources,
the men and women behind the Public Storage name.

We have evolved a plan to bring our vision of being The

First Choice to each employee by:

q Making it known. We are conveying our vision to

employees and everyone else closely connected with
the Public Storage system by emphasizing our mutual
goals of productivity, pride and performance.
Structuring ourselves to realize our vision. We are orga-
nizing our property management system for optimum
efficiency. It uses state-of-the-art systems and controls,
performance standards and operating procedures to
manage the daily demands of our sizeable enterprise
effectively.
Allocating resources to achieve our vision. We are
allocating human and financial resources to achieve
our vision. Our national reservation center contributes
to our competitive edge by offering our customers new
and improved services and products. Our customer
service center helps resolve tenant concerns.
Sustaining our vision through policies, procedures and
training. Our policies and procedures help standardize
how we manage our national property system. Our
training of property management personnel emphasizes
customer service. Our on-site property managers are
normally the self-storage customer’s first face-to-face
contact with our Company. Portable self-storage truck
drivers are trained to be helpful and courteous; they
make the first in-person contact with the public. We
want employees who can successfully manage relation-
ships with consumers as well as perform under pres-
sure. We want people who can champion our vision.
Encouraging employees to convey our vision. We are
finding ways to enable our most important internal
resource — employees — to convey the vision to
customers, the investment community, vendors and
potential employees.

The national reservation center is the linchpin in our marketing strategies
and an important part of our vision to be The First Choice.

Capitalization Strategy—
Maintaining low long-term capital costs

We believe that our strong financial position creates access to
capital. Low debt and unsecured credit facilities augment our
access to capital for growth. In the last five years we have issued
approximately $1.5 billion of common equity and perpetual
preferred in public offerings.

Access to capital for a growing company is essential.
Having the organizational structure that can utilize a steady
infusion of capital is equally important. Our real estate devel-
opment and acquisition department identifies and develops
properties, and our property management system incorporates
extensive technologies and systems and controls to absorb
newly developed or acquired properties efficiently.

We believe our access to long-term capital at favorable
costs is connected to our quality properties in prime locations,
strong trade name, industry position, experienced executives
and directors, real estate development/acquisition expertise,
long history of successful operations, property management
operational systems, innovation and flexibility and conservative
distribution policy.

Access to favorable financing and market presence are some

of the benefits accruing to a strong trade name. Our 1,073 self-
storage properties operate under the most recognized trade name
in the self-storage industry. We continue to find ways to augment
the status of the Public Storage sign in the marketplace, such as
through our “facility repackaging program,” which improves and
standardizes the appearance of our properties.

q
q
q
q
P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Operations Strategy—
Low self-storage operating costs are advantageous

We believe we are among the most effective self-storage operators
in the industry. Our operating efficiency is enhanced by the
economies of scale and management efficiencies we enjoy by
operating a sizeable, geographically diversified portfolio. A
typical feature of a geographically diversified portfolio is stable
cash flows. No single self-storage property accounts for more
than a small fraction of our revenues. Organizing our properties
within geographic markets permits cost-effective allocation of
marketing expenditures and management supervision.

Low self-storage operating costs also result from using

a comprehensive computerized property management system.
This system is in place at all of our self-storage properties,
creating a network that is linked to corporate headquarters. The
system transmits and receives data regarding unit availability,
delinquencies, accounting and cash management. Convenience
refinements now allow customers to purchase unit space and
products with VISA, MasterCard and American Express
credit cards and to complete rental applications through our
“publicstorage.com” Internet site.

Revenue Diversification Strategy —
Differentiating ourselves from competitors

Public Storage is a diversified enterprise possessing a strong core
operating business—self-storage facilities. We have complemented
our core business with subsidiaries operating portable self-
storage, retail stores and truck rentals.

Public Storage Pickup & DeliverySM (PSPUD), a subsidiary

of Public Storage, operates a portable self-storage business that
rents self-storage containers to customers for storage in central
warehouses. During 1997, PSPUD opened 45 facilities which
combined with its previously opened facilities increased the
number of opened facilities to 49 (in 16 states) as of December 31,
1997. In January and February 1998, PSPUD opened five
additional facilities. PSPUD has also identified an additional 15
sites in existing markets for development of PSPUD facilities at
an aggregate estimated cost of $67.5 million.

satisfied customers NOW...and GROWING!

The industry’s most recognized trade name.

PSPUD is rapidly establishing a dominant position in this
promising segment of the self-storage industry. In this start-up
phase, PSPUD is currently producing operating losses. We
believe rising market awareness coupled with continued operat-
ing efficiencies through the implementation of a newly acquired
computer logistics program should cause operating losses to
diminish through the course of 1998. Additionally, PSPUD and
our self-storage properties share a national reservation system
and a coordinated media advertising program, which allows for
market strategies that promote both businesses’ response to
consumer demand.

PS Orangeco, a subsidiary of Public Storage, operated 75

full-service retail stores on December 31, 1997. The subsidiary
plans to open 85 additional full-service retail stores over 1998.
Almost all newly constructed Public Storage self-storage facilities
will feature a retail operation. Retail stores sell locks, boxes, tape
and other storage-related merchandise.

PS Orangeco’s truck rental activities have increased the

number of trucks for rent to 130 at 88 locations. By mid-1998
our subsidiary anticipates having approximately 25 additional
locations, encompassing virtually every market in which Public
Storage does business.

Risk Management Strategy —
Financial strength

We have pursued a strategy that minimizes debt. Consequently,
interest expense has continued to decline, equaling $6,792,000
during 1997, against $8,482,000 during 1996. Debt and related
interest expense is relatively low compared to our overall asset
base. As of December 31, 1997, Public Storage’s assets totaled
approximately $3.3 billion, a $739 million increase from
approximately $2.6 billion one year earlier. Our debt-to-equity
ratio was 3.6 percent at December 31, 1997, compared to
4.7 percent one year earlier. Maintaining a low debt load, plus
access to capital, should position us to respond to investment
opportunities in the self-storage industry. Shareholder’s equity
equaled $2.8 billion as of December 31, 1997, approximately
24 percent greater than the $2.3 billion one year ago.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Future Opportunities
Community commitment
We recognize the importance of community relations. Our efforts
to give back to the communities that support us is good for those
communities, our operations and our employees. It is important
to the quality of life in communities supporting our operations.
For example, PSPUD helped the Marine Corps’ Toys for Tots
program celebrate its 50th anniversary during the 1997 holiday
season. PSPUD provided modified Pak & Store™ self-storage
containers for holiday toy collection at select Public Storage
facilities in Southern California. PSPUD also arranged to display
self-storage containers outside 30 Target Stores throughout the
Southern California region to collect toys. PSPUD provided the
self-storage containers for charitable events ranging from celebrity
basketball games to fun runs to parades. These efforts raised
PSPUD’s visibility in the communities served and helped brighten
the holidays for deserving young people.

Joint venture
In April 1997, we formed a joint venture partnership with a state
pension fund to develop up to $220 million of self-storage facil-
ities. The partnership is funded solely with equity capital pro-
vided 30 percent by the Company and 70 percent by the state
pension fund. Initially, we contributed eight facilities which
were under development to the joint venture partnership. We
had invested approximately $32 million in the joint venture as
of December 31, 1997.

Self-storage property acquisitions and development
During 1997, we purchased four self-storage facilities containing
approximately 241,000 net rentable square feet of storage space
for an aggregate cost of approximately $18.1 million. In addition,
an affiliate of the Company acquired 10 commercial properties
with approximately 2.7 million net rentable square feet, for an
aggregate acquisition cost of approximately $166.4 million.

The Company and the construction joint venture partnership

also opened nine new self-storage facilities during 1997 that we
had developed. Collectively, these facilities encompass 530,000
net rentable square feet. As of December 31, 1997, the Company
and the construction joint venture partnership had 21 self-storage
facilities (1,442,000 net rentable square feet) in various stages of
development and had identified 17 additional facilities (1,031,000
net rentable square feet) which we expect to begin constructing
during 1998.

Telecommunications
On December 31, 1996, our national reservation center consisted of
87 representatives. One year later, there were 249 individuals on
staff. The national reservation center has evolved into an important
linchpin in our marketing strategies. The center helps us raise
occupancy and increase market share. We are realizing the benefits
of marketing and inventory management techniques with our
national reservation center at the hub. We are properly staffed to
receive an anticipated 250,000 calls per month during the peak
spring and summer periods. In addition to self-storage, the center
markets portable self-storage, truck rentals and retail stores. We are
aggressively responding to the customer demand we are generating
through various media, enabling us to support favorable occu-
pancy trends and rental rates.

Financial Review

Revenues for 1997 increased to $470,844,000 compared to
$338,951,000 in 1996, representing an increase of $131,893,000
or 38.9 percent. Net income for 1997 was $178,649,000 com-
pared to $153,549,000 in 1996, representing an increase of
$25,100,000 or 16.4 percent. The increase in net income for 1997
compared to 1996 was primarily the result of improved property
operations, the acquisition of additional real estate facilities during
1997 and 1996, and the acquisition of additional partnership
interests during 1997 and 1996, offset partially by start-up oper-
ating losses in PSPUD’s portable self-storage business.

Net income allocable to common shareholders was

$90,256,000 or $.91 per common share on a diluted basis
(based on 98,961,000 weighted average shares) for 1997 com-
pared to $84,950,000 or $1.10 per common share on a diluted
basis (based on 77,358,000 weighted average shares) for 1996.
In computing net income per common share, dividends to the
Company’s preferred shareholders ($88,393,000 and $68,599,000
for 1997 and 1996, respectively) have been deducted from net
income in determining net income allocable to the Company’s
common shareholders. Net income allocable to common share-
holders has been negatively impacted by losses generated from
PSPUD’s portable self-storage business which generated operating
losses of $31,665,000 or approximately $.32 per common share
on a diluted basis in 1997 ($826,000, or approximately $.01 per
common share on a diluted basis in 1996).

In addition, net income allocable to the common share-
holders for 1997 was negatively affected by a special dividend
totaling $13,412,000 paid to the Company’s Series CC Convertible
Preferred Stock during the first quarter of 1997. As a result of the
special dividend, the Company would not have to pay another
dividend on this stock until the quarter ended March 31, 1999.
During the second quarter of 1997, the Series CC Convertible
Preferred Stock converted into common stock of the Company.
Accordingly, all of the $13,412,000 ($.14 per common share on
a diluted basis) of dividends were treated during 1997 as an
allocation of net income to the preferred shareholders in deter-
mining the allocation of net income to the common shareholders.
The special dividend eliminated the quarterly dividend of
$1.9 million and annual fixed charges of $7.6 million.

Funds from operations per common share on a fully-
diluted basis for 1997 were $1.97, compared to $1.98 for 1996,
decreasing $.01 per common share. Funds from operations per
common share on a fully-diluted basis for 1997 were negatively
impacted by the dilutive effects of start-up losses from PSPUD’s
portable self-storage operations which resulted in a reduction
of $.32 per common share for 1997. In addition, funds from
operations for 1996 were negatively impacted by the effect of
the Company’s Series CC Convertible Preferred Stock.

Same Stores
For 1997, occupancy at the self-storage properties on a Same Store
basis averaged 91.8 percent, compared to 91.2 percent during
1996. Same Store average annual realized rents were $9.24 per
square foot for 1997, a 5.5 percent increase compared to

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Total Revenues
In Millions

Net Income
In Millions

$200

150

100

1995 1996 1997

$500

400

300

200

100

Funds From Operations
Allocable to
Common Shareholders
In Millions

$200

Funds From Operations
Per Diluted Common Share(1)

$1.98

$1.97

$1.73

$2.50

2.00

1.50

1.00

.50

1995 1996 1997

(1) Assumes conversion of the Company’s

Convertible Preferred Stock into
common stock.

Weighted Average
Occupancy Levels
Same Store Facilities(1)

92%

1995 1996 1997

(1) “Same Store” refers to self-storage

facilities in which the Company had
an interest since January 1, 1993.

Annual Realized Rent
Per Square Foot
Same Store Facilities(1)

$10.00

$8.40

$8.76

$9.24

8.00

6.00

4.00

2.00

1995 1996 1997

(1) “Same Store” refers to self-storage

facilities in which the Company had

an interest since January 1, 1993.

7
7

Total Assets
In Billions

Shareholders’ Equity
In Billions

Debt as Percent of
Shareholders’ Equity

$3.0

2.5

2.0

1.5

1.0

0.5

10%

1995 1996 1997

$8.76 per square foot for 1996.
Realized rent per square foot
represents the actual revenue
earned per occupied square foot.
This is believed to be a more
relevant measure than posted or
scheduled rates, since posted
rates can be discounted through
promotions. Same Store rental
income increased 6.6 percent
($475.2 million for 1997 versus
$445.6 million for 1996). Same
Store cost of operations increased
6.0 percent ($167.7 million for
1997 versus $158.2 million
for 1996).

Dividend
The Board of Directors declared
a $.22 per common share
quarterly dividend on March 2,
1998, along with quarterly
dividends on the Company’s
various series of preferred
stock. Distributions are payable
on March 31, 1998 to share-
holders of record as of the close
of business on March 16, 1998.
Dividends of $.88 per share
were paid on the common
stock in 1997.

The Company believes

that its practice of minimizing
distributions adds to share-
holder value. Retaining a sub-
stantial portion of funds from
operations (after funding distrib-
utions and capital improve-
ments) enables the Company to
acquire and develop properties,
invest in its other operations,
and reduce debt using internal
cash resources. This is one of the
ways the Company believes its
vision and strategies separate
it from its competitors. The
Company distributed 44 per-
cent of funds from operations
per common share for 1997 and
43 percent for 1996. Through its
relatively moderate payout ratio
in 1997 it retained $78.5 million
of capital ($110.2 million adding
back losses on PSPUD operations) to
purchase and develop properties
and invest in its other operations.

150

100

$4.0

3.0

2.0

1.0

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Consolidated Balance Sheets

December 31, 1997 and 1996

(In thousands, except per share data)

Assets
Cash and cash equivalents
Real estate facilities, at cost:

Land
Buildings

Accumulated depreciation

Construction in process

Investment in real estate entities
Intangible assets, net
Mortgage notes receivable from affiliates
Other assets

Total assets

Liabilities and Shareholders’ Equity
Revolving line of credit
Notes payable
Accrued and other liabilities

Total liabilities

8
8

Minority interest
Commitments and contingencies

Shareholders’ Equity:

Preferred Stock, $0.01 par value, 50,000,000 shares authorized,

13,261,984 shares issued and outstanding (13,421,580 issued and outstanding
at December 31, 1996), at liquidation preference:
Cumulative Preferred Stock, issued in series
Convertible Preferred Stock

Common stock, $0.10 par value, 200,000,000 shares authorized,

105,102,145 shares issued and outstanding (88,362,026 at December 31, 1996)

Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and issued
Paid-in capital
Cumulative net income
Cumulative distributions paid
Total shareholders’ equity

Total liabilities and shareholders’ equity

See accompanying notes.

December 31,
1997

December 31,
1996

41,455

26,856

845,299
2,232,230
3,077,529
(378,248)
2,699,281
42,635
2,741,916

225,873
212,944
21,807
67,650
$3,311,645

7,000
96,558
70,648
174,206
288,479
—

868,900
53,308

10,511
700
1,903,782
575,069
(563,310)
2,848,960
$3,311,645

596,141
1,589,357
2,185,498
(297,655)
1,887,843
35,815
1,923,658

350,190
222,253
25,016
24,179
$2,572,152

—
108,443
41,467
149,910
116,805
—

718,900
114,929

8,837
700
1,454,387
396,420
(388,736)
2,305,437
$2,572,152

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Consolidated Statements of Income

For each of the three years in the period ended December 31, 1997

(In thousands, except per share data)

1997

1996

1995

Revenues:
Rental income:

Self-storage facilities
Commercial properties
Portable self-storage

Equity in earnings of real estate entities
Facility management fee
Interest and other income

Expenses:
Cost of operations:

Self-storage facilities
Commercial properties
Portable self-storage

Cost of facility management
Depreciation and amortization
General and administrative
Interest expense
Environmental cost
Advisory fee

Income before minority interest
Minority interest in income
Net income

Net income allocation:

Allocable to preferred shareholders
Allocable to common shareholders

Per Common Share:
Basic net income per share

Diluted net income per share

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

See accompanying notes.

$385,540
40,575
7,893
17,569
10,141
9,126
470,844

117,963
16,665
39,558
1,793
91,356
6,384
6,792
—
—
280,511
190,333
(11,684)
$178,649

$ 88,393
90,256
$178,649

0.92

0.91

98,446

98,961

$270,429
23,576
421
22,121
14,428
7,976
338,951

82,494
10,750
1,247
2,575
64,967
5,524
8,482
—
—
176,039
162,912
(9,363)
$153,549

$ 68,599
84,950
$153,549

1.10

77,117

77,358

$184,100
18,034
—
3,763
2,144
4,509
212,550

63,396
8,851
—
352
40,760
3,982
8,508
2,741
6,437
135,027
77,523
(7,137)
$ 70,386

$ 31,124
39,262
$ 70,386

0.96

0.95

41,039

41,171

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Consolidated Statements of Shareholders’ Equity

For each of the three years in the period ended December 31, 1997

(In thousands, except share and per share amounts)

Balances at December 31, 1994
Issuance of Preferred Stock, net of issuance costs:

Series E, F, and G (4,501,900 shares)
Convertible Participating (31,200 shares)
Issuance of Common Stock (42,687,092 shares)
Issuance of Class B Common Stock (7,000,000 shares)
Net income
Cash distributions:
Preferred Stock
Common Stock, $0.88 per share

Balances at December 31, 1995
Issuance of Preferred Stock, net of issuance costs:

Series H and I (10,750 shares)
Convertible, Series CC (58,955 shares)

Issuance of Common Stock (15,134,241 shares)
Conversion of Convertible Participating Preferred Stock into

Common Stock (1,611,265 shares)

Conversion of 8.25% Convertible Preferred Stock into

Common Stock (102,721 shares)

Net income
Cash distributions:
Preferred Stock
Common Stock, $0.88 per share

Balances at December 31, 1996
Issuance of Preferred Stock, net of issuance costs:

Series J (6,000 shares)

Issuance of Common Stock (14,376,218 shares)
Conversion of Series CC Convertible Preferred Stock into

Common Stock (2,184,250 shares)

Conversion of 8.25% Convertible Preferred Stock into

Common Stock (179,651 shares)

Net income
Cash distributions:
Preferred Stock
Common Stock, $0.88 per share

Balances at December 31, 1997

See accompanying notes.

Cumulative

$165,275

284,875

—
—
—

—
—

450,150

268,750
—
—

—

—
—

718,900

150,000
—

—

—
—

—
—
$868,900

Preferred Stock

Convertible

$ 57,500

Common
Stock

$ 2,883

—
28,470
—
—
—

—
—

85,970

—
58,955
—

(28,470)

(1,526)
—

—
—

114,929

—
—

(58,955)

(2,666)
—

—
—
$ 53,308

—

4,269
—
—

—
—

7,152

—
—
1,514

161

10
—

—
—

8,837

—
1,438

218

18
—

—
—
$10,511

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Class B
Common
Stock

—

—
700
—

—
—

700

—
—
—

—

—
—

700

—
—

—

—
—

—
—
700

Paid-in
Capital

$ 372,361

(9,718)

664,645
72,800
—

—
—

1,100,088

(8,972)
—
333,956

27,799

1,516
—

—
—

1,454,387

(5,075)
393,085

58,737

2,648
—

—
—
$1,903,782

Cumulative
Net Income

$172,485

—

—
—
70,386

—
—

242,871

—
—
—

—

—
153,549

—
—

396,420

—
—

—

—
178,649

—
—
$575,069

Cumulative
Distributions

$(182,718)

—

—
—
—

(31,124)
(38,586)

(252,428)

—
—
—

—

—
—

(68,599)
(67,709)

(388,736)

—
—

—

—
—

(88,393)
(86,181)
$(563,310)

Total
Shareholders’
Equity

$ 587,786

275,157
28,470
668,914
73,500
70,386

(31,124)
(38,586)

1,634,503

259,778
58,955
335,470

(510)

—
153,549

(68,599)
(67,709)

2,305,437

144,925
394,523

—

—
178,649

(88,393)
(86,181)
$2,848,960

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Consolidated Statements of Cash Flows

For each of the three years in the period ended December 31, 1997

(In thousands)

Cash Flows From Operating Activities:

1997

1996

1995

Net income
Adjustments to reconcile net income to net cash provided by operating activities:

$ 178,649

$ 153,549

$ 70,386

Depreciation and amortization
Depreciation included in equity in earnings

of real estate entities

Environmental accrual (including $510 from
equity in earnings of real estate entities)

Minority interest in income

Total adjustments
Net cash provided by operating activities

Cash Flows From Investing Activities:

Principal payments received on mortgage notes receivable
Acquisition of minority interests in

consolidated real estate partnerships
Acquisition of mortgage notes receivable
Acquisition of real estate facilities
Acquisition cost of business combinations
Acquisition of interests in real estate entities
Investment in portable self-storage business
Construction in process
Capital improvements to real estate facilities

Net cash used in investing activities

Cash Flows From Financing Activities:

Net borrowings (paydowns) on revolving line of credit
Net proceeds from the issuances of preferred stock
Net proceeds from the issuances of common stock
Principal payments on mortgage notes payable
Distributions paid to shareholders
Distributions from operations to minority interests in

consolidated real estate partnerships
Net reinvestment by minority interests in
consolidated real estate partnerships

Other

Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year

See accompanying notes.

91,356

11,474

—
11,684
114,514
293,163

64,967

17,450

—
9,363
91,780
245,329

40,760

2,045

3,251
7,137
53,193
123,579

409

1,784

2,063

(21,559)
—
(65,225)
(164,808)
(46,151)
(29,997)
(45,865)
(35,117)
(408,313)

7,000
144,925
182,523
(11,885)
(174,574)

(15,419)
(3,709)
(198,404)
(113,522)
(83,893)
—
(46,097)
(20,366)
(479,626)

—
259,778
130,538
(51,310)
(136,308)

(32,683)
(12,355)
(103,061)
(57,374)
(20,657)
—
(13,244)
(11,361)
(248,672)

(37,607)
275,157
80,526
(39,212)
(69,072)

(20,929)

(20,853)

(18,380)

3,527
(838)
129,749
14,599
26,856
$ 41,455

3,976
(5,104)
180,717
(53,580)
80,436
$ 26,856

(1,739)
(4,295)
185,378
60,285
20,151
$ 80,436

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

For each of the three years in the period ended December 31, 1997

(In thousands)

1997

1996

1995

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Investing Activities:

Acquisition of real estate facilities in exchange for minority interests,

common stock, the assumption of mortgage notes payable,
the cancellation of mortgage notes receivable and
the reduction of investment in real estate entities

$(119,279)

$ (4,292)

$ (87,941)

Business combinations (Note 3):

Real estate facilities
Investment in real estate entities
Mortgage notes receivable
Other assets
Intangible assets
Accrued and other liabilities
Notes payable
Minority interest

Reduction of investment in real estate entities in exchange for

real estate facilities

Investment in real estate entities
Acquisition of partnership interests in real estate entities

in exchange for common stock

Financing Activities:

Cancellation of mortgage notes receivable to acquire real estate facilities
Assumption of mortgage notes payable upon the acquisition

of real estate facilities

Reduction in construction in process — contribution to joint venture
Minority interest issued in exchange for real estate facilities
Accrued and unpaid distributions
Issuance of Preferred Stock:

Mandatory Convertible Preferred Stock, Series CC to acquire interest in

consolidated real estate partnerships

Mandatory Convertible Participating Preferred Stock to acquire interest in

consolidated real estate partnerships

Issuance of Common Stock:

In connection with mergers
Acquire real estate facilities
Acquire partnership interests in real estate entities
In connection with conversion of Convertible Preferred Stock
Issuance of Class B Common Stock in connection with mergers
Conversion of 8.25% Convertible Preferred Stock
Conversion of Mandatory Convertible Preferred Stock

See accompanying notes.

(657,347)
189,400
—
(4,119)
—
21,190
—
74,068

—
30,406

—

—
(30,406)
119,279
—

—

212,000
—
—
61,621
—
(2,666)
(58,955)

(531,794)
124,696
—
(5,849)
—
15,399
—
20,139

1,891
—

—

700

1,701
—
—
—

(230,519)
(385,222)
(6,667)
(8,862)
(232,726)
17,134
96,728
17,034

—
—

(4,034)

16,435

60,908
—
—
638

58,955

—

28,470

204,932
—
—
29,486
—
(1,526)
(28,470)

573,756
10,598
4,034
—
73,500
—
—

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Notes to Consolidated Financial Statements

December 31, 1997

Note 1. Description of the Business

Public Storage, Inc. (the “Company”) is a California corporation which was organized in 1980. The Company is a fully integrated, self-
administered and self-managed real estate investment trust (“REIT”) that acquires, develops, owns and operates self-storage facilities which
offer self-storage spaces for lease, usually on a month-to-month basis, for personal and business use. The Company, through a majority-
owned subsidiary, also owns and operates commercial properties containing commercial and industrial rental space.

Prior to November 16, 1995, the Company’s operations were managed, pursuant to contractual arrangements, by Public Storage Advisers,

Inc. (the “Adviser”), the Company’s investment advisor, by Public Storage Management, Inc. (“PSMI”), its self-storage facilities property
operator and by Public Storage Commercial Properties Group, Inc., its commercial property operator. On November 16, 1995, in a series of
mergers among PSMI and its affiliates, culminating in the merger of PSMI into the Company (the “PSMI Merger’’), the Company became
self-administered and self-managed and acquired substantially all of the United States real estate operations of PSMI.

In 1996 and 1997, the Company organized Public Storage Pickup and Delivery, Inc. as a separate corporation and a related partnership
(the corporation and partnership are collectively referred to as “PSPUD”) to operate a portable self-storage business that rents storage containers
to customers for storage in central warehouses. At December 31, 1997, PSPUD operated 49 facilities in 16 states.

On January 2, 1997, the Company reorganized its commercial property operations into a separate private REIT (the “Private REIT”).
The Private REIT contributed its assets to a newly created operating partnership (the “Operating Partnership”) in exchange for a general
partnership interest and limited partnership interests. The Company and certain partnerships in which the Company has a controlling
interest contributed substantially all of their commercial properties to the Operating Partnership in exchange for limited partnership interests
or to the Private REIT in exchange for common stock. At December 31, 1997, the Private REIT and the Operating Partnership owned 49
properties located in 10 states. The Operating Partnership also managed the commercial properties owned by the Company and affiliated
entities. As of December 31, 1997, the Company owned approximately 53% of the Private REIT which owned approximately 19% of the
Operating Partnership. The balance of the Operating Partnership is primarily owned by the Company and partnerships controlled by the
Company. On March 17, 1998, the Private REIT merged into Public Storage Properties XI, Inc., an affiliated publicly traded REIT and the
name of the surviving corporation was changed to PS Business Parks, Inc. (“PSBP”).

The Company invests in real estate facilities primarily through the acquisition of wholly-owned facilities combined with the acquisition of
equity interests in real estate entities owning real estate facilities. At December 31, 1997, the Company had direct and indirect equity interests
in 1,136 properties located in 38 states, including 1,073 self-storage facilities and 63 commercial properties. All of these facilities are operated
by the Company under the “Public Storage” name.

Note 2.

Summary of Significant Accounting Policies

Basis of presentation
The consolidated financial statements include the accounts of the Company, PSPUD, the Private REIT, the Operating Partnership, and
33 controlled limited partnerships (the “Consolidated Entities”). Collectively, the Company, the Operating Partnership and the Consolidated
Entities own a total of 955 real estate facilities, consisting of 894 self-storage facilities and 61 commercial properties.

At December 31, 1997, the Company also has equity investments in 29 other affiliated limited partnerships and two REITs owning in
aggregate 181 real estate facilities (179 self-storage facilities and 2 commercial properties) which are managed by the Company. The Company’s
ownership interest in such real estate entities is less than 50% of the total equity interest and the Company’s investments in these entities
are accounted for using the equity method.

Use of estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.

Income taxes
For all taxable years subsequent to 1980, the Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of
the Internal Revenue Code. As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders
provided that the Company meets certain tests. The Company believes it has met these tests during 1997, 1996 and 1995; accordingly, no
provision for income taxes has been made in the accompanying financial statements.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Financial instruments
For purposes of financial statement presentation, the Company considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.

The carrying amount of cash and cash equivalents and mortgage notes receivable approximates fair value because with respect to cash and
cash equivalents maturities are less than three months and with respect to the mortgage notes receivable applicable interest rates approximate
market rates for these loans. The carrying amount of the Company’s fixed rate long-term debt is estimated using discounted cash flow analyses
based on incremental borrowing rates the Company believes it could obtain with similar terms and maturities.

Real estate facilities
Real estate facilities are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the
buildings and improvements, which are generally between 5 and 25 years.

Allowance for possible losses
The Company has no allowance for possible losses relating to any of its real estate investments, long-lived assets and mortgage notes receivable.
The need for such an allowance is evaluated by management by means of periodic reviews of its investment portfolio.

Intangible assets
Intangible assets consist of property management contracts ($165,000,000) and the cost over the fair value of net tangible and identifiable
intangible assets ($67,726,000) acquired in the PSMI Merger. Intangible assets are amortized straight-line over 25 years. At December 31,
1997 and 1996, intangible assets are net of accumulated amortization of $19,782,000 and $10,473,000, respectively. Included in depreciation
and amortization expense is $9,309,000 in 1997, $9,309,000 in 1996 and $1,164,000 in 1995 (for the period from November 16, 1995
through December 31, 1995) related to the amortization of intangible assets.

Revenue and expense recognition
Property rents are recognized as earned. Equity in earnings of real estate entities are recognized based on the Company’s ownership interest
in the earnings of each of the unconsolidated real estate entities. Advertising costs are expensed as incurred.

Environmental costs
The Company’s policy is to accrue environmental assessments and/or remediation cost when it is probable that such efforts will be required and
the related costs can be reasonably estimated. The majority of the Company’s real estate facilities were acquired prior to the time that it was
customary to conduct environmental assessments. During 1995, the Company and the Consolidated Entities conducted independent environmental
investigations of their real estate facilities. As a result of these investigations, the Company recorded an amount which, in management’s best
estimate and based upon independent analysis, was sufficient to satisfy anticipated costs of known remediation requirements. At December 31,
1995, the Company accrued $2,741,000 for estimated environmental remediation costs. Similar to the Company, real estate entities in which the
Company accounts for using the equity method recorded environmental accruals at the end of 1995. The Company’s pro rata share, based on its
ownership interest, totaled $510,000 and is included in “Equity in earnings of real estate entities” in 1995. Although there can be no assurance,
the Company is not aware of any environmental contamination of any of its facilities which individually or in the aggregate would be material
to the Company’s overall business, financial condition, or results of operations.

Net income per common share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation
of primary and fully diluted net income per share with basic and diluted net income per share. Unlike primary net income per share, basic
net income per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is very similar
to the previously reported fully diluted net income per share. All net income per share amounts for all periods have been presented and
where appropriate, restated to conform to Statement 128 requirements.

Diluted net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options).
The Class B Common Stock is not included in the determination of net income per common share because all contingencies required for
the conversion to common stock have not been satisfied as of December 31, 1997. In addition, the inclusion of the Company’s convertible
preferred stock in the determination of net income per common share has been determined to be anti-dilutive.

In computing earnings per common share, preferred stock dividends totaling $88,393,000, $68,599,000 and $31,124,000 for the years

ended December 31, 1997, 1996 and 1995, respectively, reduced income available to common stockholders.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Stock-based compensation
In October 1995, the FASB issued SFAS No. 123 “Accounting for Stock-Based Compensation” (“Statement 123”) which provides companies
an alternative to accounting for stock-based compensation as prescribed under APB Opinion No. 25 (APB 25). Statement 123 encourages,
but does not require companies to recognize expense for stock-based awards based on their fair value at date of grant. Statement 123 allows
companies to continue to follow existing accounting rules (intrinsic value method under APB 25) provided that pro-forma disclosures are
made of what net income and earnings per share would have been had the new fair value method been used. The Company has elected to
adopt the disclosure requirements of Statement 123 but will continue to account for stock-based compensation under APB 25. Statement 123’s
disclosure requirements are applicable to stock-based awards granted in fiscal years beginning after December 15, 1994.

Reclassifications
Certain reclassification have been made to the consolidated financial statements for the years ended December 31, 1996 and 1995 in order
to conform with the 1997 presentation.

Note 3. Business Combinations

Mergers with affiliated REITs
During 1997, the Company completed merger transactions with six affiliated public REITs whereby the Company acquired all the outstanding
stock of the REITs which it did not previously own in exchange for cash and common stock of the Company. The aggregate acquisition cost
of these mergers is summarized as follows:

Merger consideration (In thousands)

Entity

Public Storage Properties XIV, Inc.
Public Storage Properties XV, Inc.
Public Storage Properties XVI, Inc.
Public Storage Properties XVII, Inc.
Public Storage Properties XVIII, Inc.
Public Storage Properties XIX, Inc.

Date of merger

April 11, 1997
April 11, 1997
June 24, 1997
June 24, 1997
June 24, 1997
June 24, 1997

Common
Stock

$ 34,450
29,764
41,060
34,590
39,727
32,409

$212,000

Cash

$ 9,145
8,883
10,804
15,793
17,570
6,667

$68,862

Pre-existing
investment

$ 19,977
18,137
22,225
25,862
19,841
18,003

Total

$ 63,572
56,784
74,089
76,245
77,138
57,079

$124,045

$404,907

During 1996, the Company completed merger transactions with eight affiliated public REITs whereby the Company acquired all the
outstanding stock of the REITs for an aggregate cost of $356,835,000, consisting of the issuance of 8,839,181 shares of the Company’s
common stock ($204,932,000), $79,461,000 reduction of the Company’s pre-existing investment and $72,442,000 in cash.

Affiliated partnership acquisitions:
During 1997, the Company increased its ownership interest in 12 affiliated limited partnerships in which the Company is the general partner.
Prior to the acquisitions, the Company accounted for its investment in each of the 12 partnerships using the equity method. As a result of
increasing its ownership interest and obtaining control of the partnerships, the Company began to consolidate the accounts of the partnerships
in the Company’s consolidated financial statements. These transactions are summarized as follows:

Entity

(In thousands)
PS Institutional Fund II
PS Miniwarehouses Funds I-IX
PS Co-Investment Partnership

Economic
Interest after
Acquisition

75%
95%
52%

Date
Purchased

Sept. 1997
Oct. 1997
Nov. 1997

Cash

$52,124
28,244
15,578

$95,946

Pre-existing
investment

$44,262
4,582
16,511

$65,355

Total

$ 96,386
32,826
32,089

$161,301

During 1996, the Company increased its ownership interest and obtained control of three limited partnerships. As a result, commencing
in 1996, the Company began to consolidate the accounts of these partnerships for financial statement purposes. The aggregate amount of the
interests acquired totaled $145,270,000 consisting of the issuance of $58,955,000 of Series CC Convertible Preferred Stock, $45,235,000
reduction of the Company’s pre-existing investment and cash of $41,080,000.

Each of the above mergers with affiliated REIT’s and acquisitions of partnership interests discussed above has been accounted for as a
purchase; accordingly, allocations of the total acquisition cost to the net assets acquired were made based on the fair value of such assets and

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

liabilities as of the dates of each respective transaction. The fair market values of the assets acquired and liabilities assumed with respect to
the transactions occurring in 1997 and 1996 are summarized as follows:

(In thousands)

1997 business combinations:
Real estate facilities
Other assets
Accrued and other liabilities
Minority interest

1996 business combinations:
Real estate facilities
Other assets
Accrued and other liabilities
Minority interest

REIT
mergers

Partnership
Acquisitions

$413,597
2,424
(11,114)
—

$404,907

$364,984
5,032
(13,181)
—

$356,835

$243,750
1,695
(10,076)
(74,068)

$161,301

$166,810
817
(2,218)
(20,139)

$145,270

Total

$657,347
4,119
(21,190)
(74,068)

$566,208

$531,794
5,849
(15,399)
(20,139)

$502,105

The historical operating results of the above acquisitions prior to each respective acquisition date have not been included in the

Company’s historical operating results. Pro forma data (unaudited) for the years ended December 31, 1997 and 1996 as though the business
combinations above had been effective at the beginning of fiscal 1996 are as follows:

(In thousands, except per share data)

Revenues
Net income
Net income per common share (Basic)
Net income per common share (Diluted)

For the Year
Ended December 31,

1997

$515,286
$181,678
0.92
$
0.91
$

1996

$453,940
$173,542
1.13
$
1.13
$

The pro forma data does not purport to be indicative either of results of operations that would have occurred had the transactions occurred

at the beginning of fiscal 1996 or future results of operations of the Company. Certain pro forma adjustments were made to the combined
historical amounts to reflect (i) expected reductions in general and administrative expenses, (ii) estimated increased interest expense from
bank borrowings to finance the cash portion of the acquisition cost and (iii) estimated increase in depreciation and amortization expense.

Note 4. Real Estate Facilities

Activity in real estate facilities during 1997, 1996 and 1995 is as follows:
(In thousands)

Operating facilities, at cost:

Beginning balance
Property acquisitions:

Business combinations (Note 3)
Other acquisitions

Developed facilities
Acquisition of minority interest (Note 8)
Capital improvements
Property dispositions

Ending balance

Accumulated depreciation:

Beginning balance
Additions during the year
Property dispositions

Ending balance

Construction in progress:
Beginning balance
Current development cost
Property contribution to real estate entities
Newly opened development facilities

Ending balance

Total real estate facilities

1997

1996

1995

$2,185,498

$1,405,155

$ 967,718

657,347
184,504
8,639
8,904
35,117
(2,480)

531,794
202,696
18,261
7,226
20,366
—

230,519
191,002
5,265
(223)
11,361
(487)

3,077,529

2,185,498

1,405,155

(297,655)
(82,047)
1,454

(378,248)

35,815
45,865
(30,406)
(8,639)

42,635

(241,966)
(55,689)
—

(297,655)

7,979
46,097
—
(18,261)

35,815

(202,745)
(39,376)
155

(241,966)

—
13,244
—
(5,265)

7,979

$2,741,916

$1,923,658

$1,171,168

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

During 1997, the Company acquired a total of 176 real estate facilities for an aggregate cost of $657,347,000 in connection with

certain business combinations (Note 3). The Company also acquired an additional 14 real estate facilities from third parties with an aggregate
acquisition cost of $184,504,000 consisting of the issuance of minority interests ($119,279,000) and cash ($65,225,000).

During 1996, the Company acquired a total of 154 real estate facilities for an aggregate cost of $531,794,000 in connection with

certain business combinations (Note 3). The Company also acquired an additional 58 real estate facilities from third parties with an aggregate
acquisition cost of $202,696,000 consisting of the cancellation of mortgage notes receivable ($700,000), cancellation of pre-existing investments
($1,891,000), assumption of mortgage notes payable ($1,701,000), and cash ($198,404,000).

During 1995, the Company acquired a total of 95 real estate facilities for an aggregate cost of $230,519,000 in connection with certain
business combinations. During 1995, the Company also acquired an additional 57 real estate facilities for an aggregate cost of $191,002,000
consisting of the cancellation of mortgage notes receivable ($16,435,000), the assumption of mortgage notes payable ($60,908,000),
issuance of common stock ($10,598,000) and cash ($103,061,000).

Commencing in 1995, the Company began to construct self-storage facilities and in 1997 PSPUD commenced construction of portable
self-storage facilities. Through December 31, 1997, the Company constructed and opened for operation seven self-storage facilities, one of
which began operations in August 1995, four in 1996 and two in 1997. Included in construction in progress at December 31, 1997 are costs
related to the construction of four self-storage facilities and 10 portable self-storage facilities and an additional 17 self-storage facilities and
5 portable self-storage facilities planned for development.

A substantial number of the real estate facilities acquired during 1997, 1996 and 1995 were acquired from affiliates in connection with
business combinations with an aggregate acquisition cost of approximately $657,347,000, $531,794,000 and $230,519,000 respectively.

In April 1997, the Company and a state pension fund created a joint venture partnership for the purpose of developing up to $220 million
of self-storage facilities. The Company owns 30% of the partnership interest and the state pension fund owns the remaining 70% interest. In
connection with the formation of the joint venture partnership, the Company contributed eight self-storage facilities ($30,406,000), which
were under construction, to the joint venture partnership in exchange for its partnership interest. The Company’s investment in the joint
venture partnership is accounted for using the equity method (See Note 5).

At December 31, 1997, the adjusted basis of real estate facilities for Federal income tax purposes was approximately $2.3 billion which is

net of accumulated depreciation of $733 million.

Note 5.

Investments in Real Estate Entities

During 1997 and 1996, the Company’s investment in real estate entities decreased principally as a result of business combinations whereby the
Company eliminated approximately $189.4 million and $124.7 million of pre-existing equity in real estate entity investments, respectively.
Offsetting these decreases are additional investments in numerous other unconsolidated affiliates for $46.2 million and $83.9 million in 1997
and 1996, respectively, in cash.

During 1995, the Company (i) acquired limited and general partnership interests in 47 partnerships and common stock in 16 REITs in
connection with the PSMI Merger at an aggregate cost of $389,686,000, (ii) acquired additional interests in some of the same partnerships
and REITs for an aggregate cost of $23,953,000, consisting of common stock ($4,034,000) and cash ($19,919,000) and (iii) reclassified
investments in partnerships which commencing in 1995 are consolidated with the Company ($4,464,000).

At December 31, 1997, the Company’s investments in real estate entities consist generally of ownership interests in 29 affiliated

partnerships and common stock in two affiliated REITs. Such interests consist of ownership interests of less than 50% and are accounted for
using the equity method of accounting. Accordingly, earnings are recognized by the Company based upon the Company’s ownership interest
in each of the partnerships and REITs. Provisions of the governing documents of the partnerships and REITs provide for the payment of
preferred cash distributions to other investors (until certain specified amounts have been paid) without regard to the pro rata interest of
investors in current earnings.

During 1997, 1996 and 1995, the Company recognized earnings from its investments of $17,569,000, $22,121,000 and $3,763,000,
respectively, and received cash distributions totaling $15,673,000, $27,326,000 and $5,580,000, respectively. Included in equity in earnings
of real estate entities for 1997, 1996 and 1995 is the Company’s share of depreciation expense ($11,474,000, $17,450,000 and $2,045,000,
respectively) and environmental costs ($510,000 in 1995) of the real estate entities.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Summarized combined financial data (based on historical cost) with respect to those real estate entities in which the Company had an

ownership interest at December 31, 1997 are as follows:

(In thousands)

Year ended December 31,

Rental income
Total revenues
Cost of operations
Depreciation
Net income

At December 31,

Total assets, net of accumulated depreciation
Total debt
Total equity

1997

1996

$ 94,652
$ 96,650
$ 33,077
$ 12,805
$ 40,775

$467,002
$ 77,513
$370,546

$ 86,581
$ 87,945
$ 30,306
$ 11,648
$ 35,660

$363,490
$ 80,549
$271,623

As indicated above, in April 1997, the Company and a state pension fund formed a joint venture partnership for the purpose of developing

up to $220 million of self-storage facilities. As of December 31, 1997, the joint venture partnership had completed construction on seven
self-storage facilities with a total cost of approximately $40.8 million, and had 17 facilities under construction with an aggregate cost
incurred to date of approximately $48.9 million and total additional estimated cost to complete of $29.3 million. The partnership is funded
solely with equity capital consisting of 30% from the Company and 70% from the state pension fund.

Note 6. Revolving Line of Credit

As of December 31, 1997, the Company had borrowings of $7 million (none at March 27, 1998) on its unsecured credit agreement with
a group of commercial banks. The credit agreement (the “Credit Facility”) has a borrowing limit of $150 million and an expiration date
of July 31, 2001. The expiration date may be extended by one year on each anniversary of the credit agreement. Interest on outstanding
borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging
from the London Interbank Offered Rate (“LIBOR”) plus 0.40% to LIBOR plus 1.10% depending on the Company’s credit ratings and
coverage ratios, as defined. In addition, the Company is required to pay a quarterly commitment fee of 0.250% (per annum) of the unused
portion of the Credit Facility. The Credit Facility allows the Company, at its option, to request the group of banks to propose the interest rate
they would charge on specific borrowings not to exceed $50 million; however, in no case may the interest rate proposal be greater than the
amount provided by the Credit Facility.

Under covenants of the Credit Facility, the Company is required to (i) maintain a balance sheet leverage ratio of less than 0.40 to 1.00,
(ii) maintain net income of not less than $1.00 for each fiscal quarter, (iii) maintain certain cash flow and interest coverage ratios (as defined)
of not less than 1.0 to 1.0 and 5.0 to 1.0, respectively and (iv) maintain a minimum total shareholders’ equity (as defined). In addition, the
Company is limited in its ability to incur additional borrowings (the Company is required to maintain unencumbered assets with an aggregate
book value equal to or greater than three times the Company’s unsecured recourse debt) or sell assets. The Company was in compliance with
the covenants of the Credit Facility at December 31, 1997.

Note 7. Notes Payable

Notes payable at December 31, 1997 and 1996 consist of the following:

(In thousands)

7.08% unsecured senior notes, due November 2003
Mortgage notes payable:

10.55% mortgage notes secured by real estate facilities,

1997

1996

Carrying
amount

$53,250

Fair value

$ 53,250

Carrying
amount

$ 59,750

Fair value

$ 59,750

principal and interest payable monthly, due August 2004

30,355

34,571

32,115

34,964

7.07% to 11.00% mortgage notes secured by real estate

facilities, principal and interest payable monthly, due at
varying dates between July 1998 and September 2028

12,953

$96,558

12,953

$100,774

16,578

$108,443

16,578

$111,292

During 1995, in connection with the PSMI Merger, the Company assumed the 7.08% unsecured senior notes payable. The senior notes

require interest and principal payments to be paid semi-annually and have various restrictive covenants, all of which have been met at
December 31, 1997.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

The 10.55% mortgage notes consist of five notes which are cross-collateralized by 19 properties and are due to a life insurance company.

Although there is a negative spread between the carrying value and the estimated fair value of the notes, the notes provide for the
prepayment of principal subject to the payment of penalties which exceed this negative spread. Accordingly, prepayment of the notes at this
time would not be economically practicable.

Mortgage notes payable are secured by 26 of the Company’s real estate facilities having an aggregate net book value of $60.5 million at

December 31, 1997.

At December 31, 1997, approximate principal maturities of notes payable are as follows:

(In thousands)

1998
1999
2000
2001
2002
Thereafter

7.08% Unsecured
Senior Notes

$ 7,250
8,000
8,750
9,500
9,750
10,000

$53,250

Fixed Rate
Mortgage debt
(weighted average
rate of 9.77%)

$ 7,881
6,398
2,622
2,910
3,229
20,268

$43,308

Total

$15,131
14,398
11,372
12,410
12,979
30,268

$96,558

Interest paid (including interest related to the borrowings on the Credit Facility) during 1997, 1996 and 1995 was $8,884,000,

$10,312,000 and $8,595,000, respectively. In addition, in 1997, 1996 and 1995, the Company capitalized interest totaling $2,428,000,
$1,861,000 and $307,000, respectively, related to construction of real estate facilities.

Note 8. Minority Interest

In consolidation, the Company classifies ownership interests other than its own in the net assets of each of the Consolidated Entities as
minority interest on the consolidated financial statements. Minority interest in income consists of the minority interests’ share of the operating
results of the Company relating to the consolidated operations of the Consolidated Entities.

During 1997, the Company acquired limited partnership interests in the Consolidated Entities in several transactions for an aggregate cost

of $21,559,000. These transactions had the effect of reducing minority interest by approximately $12,655,000 (the historical book value of
such interests in the underlying net assets of the partnerships). The excess of the cost over the underlying book value ($8,904,000) has been
allocated to real estate facilities in consolidation. In 1996 and 1995, the Company acquired interests in the Consolidated Entities at an
aggregate cost of $15,419,000 and $32,683,000, respectively, reducing minority interest by approximately $8,193,000 and $32,906,000,
respectively. The excess of cost over underlying book values was allocated to real estate facilities in consolidation.

During 1997, the Private REIT issued shares of its common stock and the Operating Partnership issued limited partnership units to third

parties, primarily in exchange for real estate facilities, increasing minority interest approximately $117.1 million.

During 1997, 1996 and 1995, in connection with certain business combinations (Note 3) minority interest was increased by $74,068,000,

$20,139,000 and $17,034,000, respectively, representing the remaining partners’ equity interests in the aggregate net assets of the
Consolidated Entities.

Note 9.

Property Management and Advisory Contracts

Pursuant to the PSMI Merger, the Company became self-advised and self-managed; accordingly, effective November 16, 1995, the Company
no longer incurs either advisory fees or property management fees.

Prior to the PSMI Merger, PSMI provided property operation services for a fee to the Company under a management agreement and an
affiliate of PSMI administered the day-to-day investment operations for a fee pursuant to an advisory contract. Pursuant to the management
agreement, PSMI or an affiliate of PSMI operated all of the properties in which the Company invested for a fee which is equal to 6% of the
gross revenues of the self-storage facilities spaces managed and 5% of the gross revenues of the commercial properties operated. Management
fees relating to the Company’s real estate facilities, which are included in cost of operations, amounted to $10,232,000 in 1995. During 1995
(from January 1, 1995 through November 16, 1995), the Company paid advisory fees equal to $6,437,000 pursuant to the advisory contract.
In connection with the PSMI Merger, the Company acquired property management contracts for (i) self-storage facilities owned by affiliated
entities and, to a lesser extent, third parties and (ii) through ownership in a subsidiary, commercial properties. These facilities constitute all of
the United States self-storage facilities and commercial properties doing business under the “Public Storage” name and, with the exception
of third party properties, all those in which the Company had an interest. At December 31, 1997, the Company managed 1,107 self-storage
facilities (894 owned by consolidated facilities, 179 owned by unconsolidated affiliates and 34 owned by third parties) and 63 commercial
properties were managed by the Operating Partnership (61 owned by consolidated affiliates and two owned by unconsolidated affiliates).

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

The property management contracts generally provide for compensation equal to 6%, in the case of the self-storage facilities, and 5%, in
the case of the commercial properties, of gross revenues of the facilities managed. Under the supervision of the property owners, the Company
coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activity, and the
selection and engagement of vendors, suppliers and independent contractors. In addition, the Company assists and advises the property
owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including resident
managers, assistant managers, relief managers and billing and maintenance personnel.

Note 10.

Shareholders’ Equity

Preferred stock
At December 31, 1997 and 1996, the Company had the following series of Preferred Stock outstanding:

Series

Series A
Series B
Series C
Series D
Series E
Series F
Series G
Series H
Series I
Series J

Total Senior Preferred Stock

Convertible
Mandatory Convertible — Series CC

Total Convertible Preferred Stock

Dividend
Rate

10.000%
9.200%
Adjustable
9.500%
10.000%
9.750%
8.875%
8.450%
8.625%
8.000%

8.25%
13.00%

At December 31, 1997

At December 31, 1996

Shares
Outstanding

1,825,000
2,386,000
1,200,000
1,200,000
2,195,000
2,300,000
6,900
6,750
4,000
6,000

Carrying
Amount

$ 45,625,000
59,650,000
30,000,000
30,000,000
54,875,000
57,500,000
172,500,000
168,750,000
100,000,000
150,000,000

Shares
Outstanding

1,825,000
2,386,000
1,200,000
1,200,000
2,195,000
2,300,000
6,900
6,750
4,000
—

Carrying
Amount

$ 45,625,000
59,650,000
30,000,000
30,000,000
54,875,000
57,500,000
172,500,000
168,750,000
100,000,000
—

11,129,650

868,900,000

11,123,650

718,900,000

2,132,334
—

2,132,334

53,308,000
—

53,308,000

2,238,975
58,955

2,297,930

55,974,000
58,955,000

114,929,000

13,261,984

$922,208,000

13,421,580

$833,829,000

During 1997, the Company issued 6,000,000 depositary shares (each representing 1/1,000 of a share) of its 8.00% Series J Preferred Stock

(August 25, 1997) raising net proceeds of approximately $144.9 million.

During 1996, the Company issued 6,750,000 depositary shares (each representing 1/1,000 of a share) of its 8.45% Series H Preferred
Stock (January 25, 1996) raising net proceeds of approximately $163.1 million and 4,000,000 depositary shares (each representing 1/1,000
of a share) of its 85/8% Series I Preferred Stock (November 1, 1996) raising net proceeds of approximately $96.7 million.

In April 1996, in connection with the acquisition of limited partnership interests (Note 3), the Company issued $58,955,000 (58,955 shares)
of its Mandatory Convertible Preferred Stock, Series CC (the “Series CC Preferred Stock”). During the second quarter of 1997, all the Series CC
Convertible Preferred Stock was converted into 2,184,250 shares of common stock.

The Series A through Series J (collectively the “Cumulative Senior Preferred Stock”) have general preference rights with respect to
liquidation and quarterly distributions. With respect to the payment of dividends and amounts upon liquidation, all of the Company’s
Convertible Preferred Stock ranks junior to the Cumulative Senior Preferred Stock and any other shares of preferred stock of the Company
ranking on a parity with or senior to the Cumulative Senior Preferred Stock. The Convertible Preferred Stock ranks senior to the common
stock, any additional class of common stock and any series of preferred stock expressly made junior to the Convertible Preferred Stock.
Holders of the Company’s preferred stock, except under certain conditions and as noted above, will not be entitled to vote on most

matters. In the event of a cumulative arrearage equal to six quarterly dividends or failure to maintain a Debt Ratio (as defined) of 50% or less,
holders of all outstanding series of preferred stock (voting as a single class without regard to series) will have the right to elect two additional
members to serve on the Company’s Board of Directors until events of default have been cured. At December 31, 1997, there were no
dividends in arrears and the Debt Ratio was 3.1%.

Except under certain conditions relating to the Company’s qualification as a REIT, the Senior Preferred Stock are not redeemable prior to

the following dates: Series A – September 30, 2002, Series B – March 31, 2003, Series C – June 30, 1999, Series D – September 30, 2004,
Series E – January 31, 2005, Series F – April 30, 2005, Series G – December 31, 2000, Series H – January 31, 2001, Series I – October 31, 2001,
Series J – August 31, 2002. On or after the respective dates, each of the series of Senior Preferred Stock will be redeemable at the option of
the Company, in whole or in part, at $25 per share (or depositary share in the case of the Series H, Series I and Series J), plus accrued and
unpaid dividends.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

The Convertible Preferred Stock is convertible at any time at the option of the holders of such stock into shares of the Company’s common

stock at a conversion rate of 1.6835 shares of common stock for each share of Convertible Preferred Stock, subject to adjustment in certain
circumstances. On or after July 1, 1998, the Convertible Stock will be redeemable for shares of the Company’s common stock at the option
of the Company, in whole or in part, at a redemption price of 1.6835 shares of common stock for each share of Convertible Stock (subject to
adjustment in certain circumstances), if for 20 trading days within any period of 30 consecutive trading days (including the last trading day
of such period), the closing price of the common stock on its principal trading market exceeds $14.85 per share (subject to adjustment in
certain circumstances). The Convertible Preferred Stock is not redeemable for cash.

Common stock
During 1997, 1996 and 1995, the Company issued shares of its common stock as follows:

(Dollar amounts in thousands)

Public offerings
In connection with mergers (Note 3)
Issuance costs of mergers
Exercise of stock options
Issuance to affiliates
Conversion of Mandatory Convertible

Preferred Stock

Conversion of Series CC Convertible

Preferred Stock

Acquisition of interests in real

estate entities

Acquisition of real estate
facilities (Note 4)

Conversion of 8.25% Convertible

Preferred Stock

1997

1996

1995

6,600,000
7,681,432
—
94,786
—

Amount

$181,448
212,000
—
1,075
—

6,151,200
8,839,181
—
100,663
43,197

Amount

$128,501
204,932
—
1,037
1,000

5,482,200
36,113,800
—
46,670
40,000

—

1,611,265

27,960

2,184,250

58,955

—

Amount

$ 82,068
573,756
(2,527)
403
582

—

257,067

4,034

747,355

10,598

179,651

2,666

102,721

1,526

—

16,740,119

$456,144

16,848,227

$364,956

42,687,092

$668,914

Shares of common stock issued to affiliates in 1996 and 1995 were issued for cash. All the shares of common stock, with the exception of

the shares issued in connection with the exercise of stock options, were issued at the prevailing market price at the time of issuance.

At December 31, 1997, the Company had 5,155,238 shares of common stock reserved in connection with the Company’s stock option

plans (Note 11) and 10,589,662 shares of common stock reserved for the conversion of the Convertible Preferred Stock and the Class B
Common Stock.

From January 1, 1998 through March 2, 1998, the Company issued approximately 6.4 million shares of Common Stock raising an

aggregate of approximately $189 million. The Company intends to use the net proceeds from this offering to make investments in real estate
and fund the activities of its portable self-storage operations.

Class B common stock
The Class B Common Stock was issued in connection with the PSMI Merger. Under the terms of the merger agreement, the issuance of the
Class B Common Stock was subject to certain conditions which were satisfied in December 1995 and the Class B Common Stock was issued
on January 2, 1996. The Company has reflected the Class B Common Stock as outstanding as of December 31, 1995.

The Class B Common Stock will (i) not participate in distributions until the later to occur of funds from operations (“FFO”) per Common
Share as defined below, aggregating $1.80 during any period of four consecutive calendar quarters, or January 1, 2000; thereafter, the Class B
Common Stock will participate in distributions (other than liquidating distributions), at the rate of 97% of the per share distributions on the
Common Stock, provided that cumulative distributions of at least $0.22 per quarter per share have been paid on the Common Stock, (ii) not
participate in liquidating distributions, (iii) not be entitled to vote (except as expressly required by California law) and (iv) automatically
convert into Common Stock, on a share for share basis, upon the later to occur of FFO per Common Share aggregating $3.00 during any
period of four consecutive calendar quarters or January 1, 2003.

For these purposes FFO means net income (loss) (computed in accordance with generally accepted accounting principles) before

(i) gain (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as
follows: (i) plus depreciation and amortization (including the Company’s pro-rata share of depreciation and amortization of unconsolidated
equity interests and amortization of assets acquired in the Merger, including property management agreements and goodwill), and (ii) less
FFO attributable to minority interest. For these purposes, FFO per Common Share means FFO less preferred stock dividends (other than
dividends on convertible preferred stock) divided by the outstanding weighted average shares of Common Stock assuming conversion of all
outstanding convertible securities and the Class B Common Stock.

For these purposes, FFO per share of Common Stock (as defined) was $1.85 for the year ended December 31, 1997.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Equity Stock
The Company is authorized to issue 200,000,000 shares of Equity Stock. The Articles of Incorporation provide that the Equity Stock may
be issued from time to time in one or more series and gives the Board of Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock.

In June 1997, the Company contributed $22,500,000 (225,000 shares) of its Equity Stock, Series A (“Equity Stock”) to a partnership in
which the Company is the general partner. As a result of this contribution, the Company obtained a controlling interest in the Partnership
and began to consolidate the accounts of the Partnership and therefore the equity stock is eliminated in consolidation. The Equity Stock
ranks on a parity with Common Stock and junior to the Company’s Cumulative Senior Preferred Stock and Convertible Preferred Stock with
respect to general preference rights and has a liquidation amount of 10 times the amount paid to each Common Share up to a maximum of
$100 per share. Quarterly distributions per share on the Equity Stock are equal to the lesser of (i) 10 times the amount paid per Common
Stock or (ii) $2.20.

Dividends
The characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by
the Internal Revenue Code. Distributions declared by the Board of Directors (including distributions to the holders of preferred stock) in
1997, 1996 and 1995 were characterized as ordinary income.

The following summarizes dividends paid during 1997, 1996 and 1995 (with the exception of the Series G Preferred Stock distributions

which were accrued and unpaid at December 31, 1995):

1997

1996

1995

(In thousands, except per share data)

Series A
Series B
Series C
Series D
Series E
Series F
Series G
Series H
Series I
Series J
Convertible
Series CC
Mandatory Convertible Participating

Common

Per share

$ 2.500
2.300
1.844
2.375
2.500
2.437
2.219
2.112
2.156
0.689
2.062
260.000
—

$ 0.880

Total

$ 4,563
5,488
2,213
2,850
5,488
5,606
15,309
14,259
8,625
4,133
4,531
15,328
—

88,393
86,181

$174,574

Per share

$ 2.500
2.300
1.840
2.375
2.500
2.437
2.219
1.978
0.359
—
2.063
97.500
54.487

$ 0.880

Total

$ 4,563
5,488
2,212
2,850
5,488
5,606
15,479
13,348
1,438
—
4,679
5,748
1,700

68,599
67,709

$136,308

Per share

$ 2.500
2.300
1.970
2.375
2.292
1.618
0.092
—
—
—
2.063
—
55.322

$ 0.880

Total

$ 4,563
5,488
2,364
2,850
5,030
3,721
638
—
—
—
4,744
—
1,726

31,124
38,586

$69,710

The dividend rate on the Series C Preferred Stock is adjusted quarterly and is equal to the highest of one of three U.S. Treasury indices
(Treasury Bill Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend
rate for any dividend period will not be less than 6.75% per annum nor greater than 10.75% per annum. The dividend rate with respect to
the first quarter of 1998 will be equal to 6.75% per annum.

The Mandatory Convertible Participating Preferred Stock was issued in connection with the acquisition of all of the limited partnership

interests in a real estate limited partnership in 1995. Dividends with respect to the Mandatory Convertible Participating Preferred Stock
varied depending on operating results of the underlying real estate facilities of the partnership. During June 1996, the Mandatory Convertible
Participating Preferred Stock was exchanged for common stock of the Company.

Note 11.

Stock Options

The Company has a 1990 Stock Option Plan (which was adopted by the Board of Directors in 1990 and approved by the shareholders in
1991) (the “1990 Plan”) which provides for the grant of non-qualified stock options. The Company has a 1994 Stock Option Plan (which was
adopted by the Board of Directors and approved by the shareholders in 1994) (the “1994 Plan”) and a 1996 Stock Option and Incentive Plan
(which was adopted by the Board of Directors and approved by the shareholders in 1996 (the “1996 Plan”), each of which provides for the
grant of non-qualified options and incentive stock options. (The 1990 Plan, the 1994 Plan and the 1996 Plan are collectively referred to as
the “Plans”). Under the Plans, the Company has granted non-qualified options to certain directors, officers and key employees and service
providers to purchase shares of the Company’s common stock at a price equal to the fair market value of the common stock at the date of
grant. Generally, options under the Plans vest over a three-year period from the date of grant at the rate of one-third per year and expire

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

(i) under the 1990 Plan, five years after the date they became exercisable and (ii) under the 1994 Plan and 1996 Plan, ten years after the date
of grant. The 1996 Plan also provides for the grant of restricted stock to officers, key employees and service providers on terms determined
by the Audit Committee of the Board of Directors; no shares of restricted stock have been granted.

Information with respect to the Plans during 1997 and 1996 is as follows:

Options outstanding January 1

Granted
Exercised
Canceled

Options outstanding December 31

Option price range at December 31

Options exercisable at December 31

Options available for grant at December 31

1997

1996

Number
of
Options

1,752,169
111,000
(94,786)
(72,168)

1,696,215

$8.125
to $30.00

778,012

3,459,003

Average
Price per
Share

$19.02
28.59
11.34
20.73

$20.03

$17.74

Number
of
Options

693,667
1,183,000
(100,663)
(23,835)

1,752,169

$8.125
to $25.875

367,947

3,497,835

Average
Price per
Share

$13.61
21.39
10.29
16.02

$19.02

$13.05

In 1996, the Company adopted the disclosure requirement provision of SFAS 123 in accounting for stock-based compensation issued
to employees. As of December 31, 1997 and 1996, there were 1,412,734, and 1,391,500 options outstanding, respectively, that were subject
to SFAS 123 disclosure requirements. The fair value of these options was estimated utilizing prescribed valuation models and assumptions
as of each respective grant date. Based on the results of such estimates, management determined that there was no material effect on net income
or earnings per share for the years ended December 31, 1997 and 1996. The remaining contractual lives were 7.9 years and 8.6 years,
respectively, at December 31, 1997 and 1996.

Note 12.

Events Subsequent to December 31, 1997

On January 21, 1998, the Private REIT entered into an agreement with a group of unaffiliated institutional investors under which it would
issue up to $155,000,000 of common stock. An initial $50,000,000 of common stock was issued on January 21, 1998 upon the closing of
the transaction. The remaining $105,000,000 of common stock will be issued as funds are required to purchase commercial properties.

In connection with the merger of the Private REIT into Public Storage Properties XI, Inc. on March 17, 1998 (the surviving entity renamed

PS Business Parks, Inc. – “PSBP”). PSBP exchanged 13 self-storage facilities for 11 commercial properties owned by the Company. Upon
completion of the merger, the Company and its Consolidated Entities owned approximately 58% of PSBP and the Operating Partnership
on a combined basis.

As a result of the March 17, 1998 merger and the agreement to issue additional shares of common stock to the group of unaffiliated
institutional investors, the Company believes that its reduced ownership will no longer warrant the consolidation of these entities effective
March 31, 1998. The Company’s consolidated financial statements include the following summarized condensed financial data associated
with the consolidation of PSBP and the Operating Partnership:

(In thousands)

Year ended December 31,

Rental income
Total revenues
Cost of operations
Depreciation
Net income before minority interest
Net income after minority interest

At December 31,

Total assets, net of accumulated depreciation
Total minority interest
Total net assets before minority interest

1997

$ 30,169
$ 31,578
$ 12,519
$ 6,973
$ 10,623
$ 9,247

$344,706
$117,731
$335,904

In February 1998, Public Storage Properties XX, Inc. (“Properties 20”) agreed, subject to certain conditions, to merge with and into the
Company. Properties 20 is an affiliated publicly traded equity REIT. The merger is conditioned on approval by the shareholders of Properties 20.
The estimated value of the Properties 20 merger is approximately $23.3 million. Properties 20 owns seven self-storage facilities (approximately
402,000 square feet) located in five states. At December 31, 1997, the Company owned approximately 24% of Properties 20. The Company
expects that, if approved by the Properties 20 shareholders, the merger would be completed in the second quarter of 1998.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Note 13. Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 130, “Reporting
Comprehensive Income” (“FAS 130”), which establishes standards for reporting and display of comprehensive income and its components.
This statement requires a separate statement to report the components of comprehensive income for each period reported. The provisions of
this statement are effective for fiscal years beginning after December 15, 1997. The Company will implement FAS 130 for the fiscal year
ended December 31, 1998, but the Company does not expect the impact of FAS 130 to be material.

In July 1997, the FASB issued Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“FAS 131”), which establishes standards for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim
financial reports issued to shareholders. This statement is effective for financial statements for periods beginning after December 15, 1997.
Management does not expect FAS 131 to have a significant impact upon the Company’s reporting presentation.

Note 14. Commitments and Contingencies

Lease obligations
Each of the 49 facilities operated by PSPUD as of December 31, 1997 are located in buildings leased from third parties. The lease terms range
from four to nine years with renewal options at varying terms. Future minimum lease payments at December 31, 1997 under noncancelable
operating leases are as follows:

(in thousands)

1998
1999
2000
2001
2002
Thereafter

Total

$11,413
10,752
10,313
9,633
6,336
3,135

$51,582

Legal proceedings
During 1997, three cases were filed against the Company. Each of the plaintiffs in these cases is suing the Company on behalf of a purported class of
California tenants who rented storage spaces from the Company and contends that the Company’s fees for late payments under its rental agree-
ments for storage space constitutes unlawful “penalties” under California law. None of the plaintiffs has assigned any dollar amount to the claims.
The lower court has dismissed one of the cases and the plaintiff in that case is in the process of appealing that dismissal. The plaintiffs in
the other two cases have voluntarily dismissed their cases, reserving their rights to refile their cases. The Company is continuing to vigorously
contest the claims in all three cases.

There are no other material proceedings pending against the Company or any of its subsidiaries.

Note 15.

Supplementary Quarterly Financial Data (Unaudited)

(In thousands, except per share data)

Revenues

Net income

Per Common Share (Note 2):

Net income — Basic

Net income — Diluted

(In thousands, except per share data)

Revenues

Net income

Per Common Share (Note 2):

Net income — Basic

Net income — Diluted

March 31,
1997

$100,740

$ 42,318

$0.26

March 31,
1996

$74,527

$32,341

$0.24

Three months ended

June 30,
1997

$109,362

$ 44,251

$0.14(1)

September 30,
1997

December 31,
1997

$126,008

$ 46,548

$0.27

$134,734

$ 45,532

$0.24

Three months ended

June 30,
1996

$82,688

$37,739

$0.27

September 30,
1996

December 31,
1996

$87,518

$40,366

$0.30

$94,218

$43,103

$0.29

(1) Includes the effect of a $13,412,000 special dividend on the Company’s Series CC Convertible Preferred Stock.

Revenues for each of the three-month periods in 1997 and 1996 reflect reclassification to conform with the fiscal 1997 presentation. The

1996 and the first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting
Standards 128 – Earnings Per Share.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Report of Independent Auditors

The Board of Directors and Shareholders
Public Storage, Inc.

We have audited the accompanying consolidated balance sheets of Public Storage, Inc. as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Public Storage, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.

Los Angeles, California

February 23, 1998, except for Notes 10 and 12,
as to which the date is March 17, 1998

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto.

Overview:

The self-storage industry is highly fragmented and is composed predominantly of numerous local and regional operators. Competition in the
markets in which the Company operates is significant and is increasing from additional development of self-storage facilities in many markets
which may negatively impact occupancy levels and rental rates at the Company’s self-storage facilities. However, the Company believes it
possesses several distinguishing characteristics which enable it to compete effectively with other owners and operators.

The Company believes it is the largest owner and operator of self-storage facilities in the United States with ownership interests in 1,073

self-storage facilities containing approximately 64 million net rentable square feet. All of the Company’s facilities are operated under the
“Public Storage” brand name, which the Company believes is the most recognized and established name in the self-storage industry. Located
in the major metropolitan markets of 37 states, the Company’s self-storage facilities are geographically diverse, giving it national recognition
and prominence. This concentration establishes the Company as one of the dominant providers of storage space in each market that it
operates in and enables it to use a variety of promotional activities, such as television and radio advertising as well as targeted discounting
and referrals, which are generally not economically viable for its competitors. In addition, the Company believes that geographic diversity of
the portfolio reduces the impact from regional economic downturns and provides a greater degree of revenue stability.

In an effort to attract a wider variety of customers, to further differentiate the Company from its competition and to generate new sources

of revenue, additional products are being offered to enhance the Company’s self-storage business. In late 1996, the Company organized
Public Storage Pickup and Delivery, Inc. as a separate corporation and a related partnership (the corporation and partnership are collectively
referred to as “PSPUD”) to operate a portable self-storage business that rents storage containers to customers for storage in central warehouses.
The concept of PSPUD is to provide an alternative to a traditional self-storage facility wherein customers transport their goods to the facility
and rent a space to store their goods. PSPUD will deliver a storage container(s) to the customer’s location where the customer, at his
convenience, packs his goods into the storage container. PSPUD will subsequently return to the customer’s location to retrieve the storage
container(s) for storage in a central warehouse. PSPUD is not intended to replace the traditional self-storage facility but is designed to
complement and provide additional services to the customers not offered at the self-storage facilities.

During 1997, PSPUD opened 45 facilities, which combined with facilities opened as of the beginning of the year brought the total number
of facilities to 49. The facilities are located in 24 greater metropolitan areas in 16 states. Averaging approximately 2,000 containers per facility,
a facility provides approximately 70,000 net rentable square feet which is slightly larger than an average self-storage facility which contains
approximately 65,000 net rentable square feet. Currently, all of the PSPUD facilities operate in facilities leased from third parties which has
provided the Company with an efficient and flexible means of expanding rapidly into markets.

At December 31, 1997, the PSPUD facilities in aggregate had 36,000 occupied containers, representing approximately 1,256,000 square
feet. The Company believes that, to some extent, the portable self-storage business may negatively impact the occupancy levels of self-storage
facilities located in the same markets. However, the Company’s average self-storage occupancy level is higher than at any comparable period
in prior years, despite the promotion and rental activity of the portable self-storage business in the same markets. In the Los Angeles,
California market, for example, where the Company has operated a consistent pool of 138 self-storage facilities since 1993, the occupancy
levels of these facilities increased from 87.8% (7.3 million occupied square feet) at January 31, 1997 to 93.1% (7.7 million occupied square feet)
at January 31, 1998, representing an increase of approximately 5.3%. During the same period of time, the newly opened PSPUD facilities in the
Los Angeles market increased their aggregate occupied containers from 957 (33,495 square feet) at January 1997 to 8,830 (309,050 square
feet) at January 1998. Accordingly, in aggregate (self-storage and portable self-storage combined), occupied square footage increased
from 7.3 million at January 31, 1997 to 8.0 million at January 31, 1998, representing an increase of approximately 700,000 square feet. The
Company is seeking to replicate this performance in other major markets in which it operates. However, there can be no assurance that the
Company will be successful.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Due to the start-up nature of the new business venture, PSPUD generated operating losses which materially impacted the Company’s
earnings in 1997 and is expected to continue to generate losses during 1998. The Company, however, continues to believe that it should
invest in PSPUD, which responds to a promising business opportunity in at least certain markets and complements the Company’s existing
self-storage operations through joint use of a national telephone reservation system and a coordinated media advertising program designed
to increase consumer awareness and rental activity of both traditional self-storage facilities and portable self-storage.

One of the keys to the successful operation of self-storage and portable self-storage businesses has been and will continue to be the
national telephone reservation system. Commencing in early 1996, the Company implemented a national telephone reservation system
designed to provide added customer service. Customers calling either the Company’s toll-free telephone referral system, (800) 44-STORE, or
a self-storage facility are directed to the national reservation system where a representative discusses with the customer space requirements,
price and location preferences and also informs the customer of other products and services provided by the Company and its subsidiaries.
The national telephone reservation system was not fully operational for most of the Company’s facilities until the latter part of the fourth
quarter of 1996. Currently, the national telephone reservation system receives approximately 160,000 calls per month and has approximately
200 representatives. The Company believes that the national telephone reservation system permits effective marketing for both self-storage
and portable self-storage facilities and is primarily responsible for increasing occupancy levels and realized rental rates experienced at the
self-storage facilities during 1997 compared to the same period in the prior year.

The Company will continue to focus its growth strategies on: (i) improving the operating performance of its existing portfolio of

properties, (ii) increasing its ownership of self-storage facilities through acquisitions of facilities owned by affiliates or third party owners,
(iii) development of new self-storage facilities, (iv) expansion and improvement of the operations of PSPUD, and (v) to a limited extent
through its existing ownership interest, will participate in the growth of PS Business Parks, Inc., a publicly traded real estate investment trust
focusing on the ownership and operation of commercial properties.

The Company seeks to increase the operating performance of its existing portfolio of properties by (i) increasing average occupancy rates

and (ii) achieving higher levels of realized monthly rents per occupied square foot. The Company believes that its property management
personnel and systems combined with the national telephone reservation system and marketing programs will enhance the Company’s ability
to meet these goals.

In addition to 533 wholly owned self-storage facilities, the Company also operates, on behalf of approximately 64 ownership entities in

which the Company has a partial equity interest, 540 self-storage facilities under the “Public Storage’’ name. From time to time, some of
these self-storage facilities or interests in them are available for purchase, providing the Company with a source of additional acquisition
opportunities. The Company believes these properties include some of the better located, better constructed self-storage facilities in the
industry. Because these properties are partially owned by the Company, it is provided with reliable operating information prior to acquisition
and these properties are easily integrated into the Company’s portfolio. During 1996 and 1997, the Company acquired 100 and 99 self-storage
facilities from affiliated entities in connection with mergers, respectively, and increased its ownership interest in 54 and 69 self-storage facilities
by acquiring additional interests in affiliated partnerships owning self-storage facilities, respectively. During 1996 and 1997, the Company
acquired 47 and 4 self-storage facilities from third parties, respectively. Similar to 1997, the Company does not expect third party acquisitions
to be significant during fiscal 1998, unless attractive investment opportunities are available.

Since 1995, the Company has developed and opened a total of seven self-storage facilities, one in 1995, four in 1996, and two in 1997.

At December 31, 1997, four self-storage facilities and ten portable self-storage facilities were under construction. Since April 1997, the
Company’s development activity with respect to the self-storage facilities, has been concentrated in a joint venture partnership between the
Company and a major state pension plan. Under the joint venture arrangement, the state pension plan contributes 70% of the equity with
the remaining 30% of the equity being provided by the Company to finance development. There is no debt included in the partnership
and the Company, after a specified period of time, has an option to acquire the state pension plan’s interest in the partnership. Due to the
Company’s non-controlling ownership interest, the joint venture partnership is not consolidated in the Company’s financial statements. The
partnership is expected to develop up to $220 million of properties (approximately 50 facilities) with expected store openings through mid-
1999. During 1997, the joint venture developed and opened seven self-storage facilities (approximately 412,000 square feet) and had 17
facilities under development (approximately 1,169,000 square feet).

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

The feasibility of developing additional self-storage and portable self-storage facilities is ongoing. The focus is on selected markets in
which there are few, if any, facilities to acquire at attractive prices and where the scarcity of other undeveloped parcels of land or other
impediments to development make it difficult to construct additional competing facilities.

In January and February 1998, PSPUD opened five additional facilities. PSPUD is currently developing 10 facilities and has also identified
an additional five sites for development which collectively have an aggregate estimated cost of $67.5 million. All such facilities are located in
existing markets in which PSPUD currently operates.

On January 2, 1997, the Company reorganized its commercial property operations into a separate private REIT. The private REIT contributed

its assets to a newly created operating partnership (the “Operating Partnership”) in exchange for a general partnership interest and limited
partnership interests. The Company and certain partnerships in which the Company has a controlling interest contributed substantially all
of their commercial properties to either the Operating Partnership in exchange for limited partnership interests or to the private REIT in
exchange for common stock. The Company believes that the concentration of all the commercial properties and the property manager into
one entity will create a vehicle which should facilitate future growth in this segment of the real estate industry. The Company will participate
in the entity’s growth through the Company’s ownership interest.

In 1997, the private REIT and Operating Partnership acquired 10 commercial properties from third parties. The aggregate purchase price

of these facilities consisted of cash, common stock of the private REIT and limited partnership interests of the Operating Partnership.

At December 31, 1997, the private REIT and the Operating Partnership owned 49 properties located in 10 states. The Operating Partnership

also managed the commercial properties owned by the Company and affiliated entities. As of December 31, 1997, the Company owned
approximately 53% of the private REIT which owned approximately 19% of the Operating Partnership. The balance of the Operating
Partnership is primarily owned by the Company and partnerships controlled by the Company.

On January 21, 1998, the private REIT entered into an agreement with a group of unaffiliated institutional investors under which up to
$155,000,000 in common stock would be issued. $50,000,000 of this common stock was issued on January 21, 1998, with the remainder
to be issued as funds are required to purchase commercial properties.

On March 17, 1998, the private REIT merged into Public Storage Properties XI, Inc., a publicly traded REIT and an affiliate of the

Company, and the name of the surviving corporation was changed to PS Business Parks, Inc. (“PSBP”). In connection with the merger, PSBP
exchanged 13 self-storage facilities for 11 commercial properties owned by the Company. Upon completion of the merger, PSBP and the
Operating Partnership owned 64 commercial properties (approximately 7.3 million square feet), and managed the commercial properties
owned by the Company and affiliated partnerships. Upon completion of the merger, the Company and partnerships controlled by the
Company owned approximately 58% of PSBP and the Operating Partnership on a combined basis.

Due to the Company’s controlling ownership interest in PSBP and the Operating Partnership, the Company included the operations of these

entities in the Company’s consolidated financial statements as of December 31, 1997. However, as a result of the March 17, 1998 merger and
the agreement to issue additional shares of common stock to the group of unaffiliated institutional investors, the Company believes that its
reduced ownership will no longer warrant consolidation of these entities effective March 31, 1998.

Since 1994, the Company has significantly increased both its asset and capital base through the investment in additional real estate
assets financed predominantly with the issuance of equity. As a result, the increased asset base has translated into significant growth in the
Company’s overall operating results. The comparative growth in operating results between 1997 and 1996 is principally due to mergers with
affiliated REITs combined with acquisitions of additional real estate facilities and investments in real estate entities. The comparative growth
in operating results between 1996 and 1995 is principally due to the impact of the Company’s merger with Public Storage Management, Inc.
(“PSMI”), whereby the Company became self-administered and self-managed and acquired substantially all of the United States real estate
operations of PSMI (the “PSMI Merger”).

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Results of Operations

Net income and earnings per common share: Net income for 1997, 1996 and 1995 was $178,649,000, $153,549,000 and $70,386,000,
respectively, representing increases over the prior year of 16.4% for 1997 and 118.2% for 1996. Net income allocable to common
shareholders (net income less preferred stock dividends) for 1997, 1996 and 1995 was $90,256,000, $84,950,000 and $39,262,000,
respectively, representing increases over the prior year of 6.3% for 1997 and 116.4% for 1996. On a diluted basis, net income per common
share was $0.91 (based on weighted average shares outstanding of 98,961,000) for 1997, $1.10 per common share (based on weighted
average shares outstanding of 77,358,000) for 1996 and $0.95 per common share (based on weighted average shares outstanding of
41,171,000) for 1995.

The decrease in net income per share for 1997 compared to 1996 was principally the result of losses generated from PSPUD’s portable

self-storage business which generated operating losses totaling $31,665,000 or $0.32 per common share and the effect of the special
dividend, discussed below. The increase in net income per share for 1996 compared to 1995 was principally the result of improved real
estate operations, partially offset by the operating losses generated by PSPUD’s portable self-storage business totaling $826,000 or $0.01 per
common share.

Net income allocable to common shareholders and net income per common share for the year ended December 31, 1997 was negatively
impacted by a special dividend totaling $13,412,000, paid on the Company’s Series CC Convertible Preferred Stock (“Series CC”) during the
first quarter of 1997. As a result of this special dividend, the Company would not have been required to pay another dividend with respect to
this stock until the quarter ended March 31, 1999. During the second quarter of 1997, the Series CC stock converted into common stock of
the Company. Accordingly during 1997, all of the $13,412,000 ($0.14 per common share, on a diluted basis) of dividends were treated as an
allocation of net income to the preferred shareholders in determining the allocation of net income to the common shareholders. The special
dividend eliminated the quarterly dividend of $1.9 million (annual fixed charges of $7.6 million).

Net income includes depreciation and amortization expense (including depreciation included in equity in earnings of real estate entities)

of approximately $93,585,000 ($0.95 per common share) for 1997, $70,927,000 ($0.92 per common share) for 1996 and $31,562,000
($0.77 per common share) for 1995. The fiscal 1995 earnings per common share also includes a reduction of approximately $0.08 per
common share relating to the accrual of estimated environmental remediation costs (discussed below).

Real Estate Operations

At December 31, 1997, the Company’s investment portfolio consisted of (i) its wholly-owned properties, (ii) properties owned by real estate
entities consolidated with the Company (the “Consolidated Entities”) and (iii) properties owned by real estate entities in which the Company’s
ownership interest and control are not sufficient to warrant the consolidation of such entities (the “Unconsolidated Entities”). The following
table summarizes the Company’s investment in real estate facilities as of December 31, 1997:

Wholly-owned facilities
Facilities owned by Consolidated Entities

Total consolidated facilities
Facilities owned by Unconsolidated Entities

Total facilities in which the Company

has an ownership interest

Number of Facilities in which the
Company has an ownership interest

Net Rentable Square Footage
(In thousands)

Self-storage
facilities

Commercial
properties

533
361

894
179

1,073

12
49

61
2

Total

545
410

955
181

Self-storage
facilities

Commercial
properties

32,635
20,936

53,571
10,453

652
6,035

6,687
191

Total

33,287
26,971

60,258
10,644

1,136

64,024

6,878

70,902

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Self-storage operations: The self-storage operations is by far the largest component of the Company’s operations, representing approximately
82% of total revenues generated during 1997. At the beginning of 1994, the Company had a total of 368 self-storage facilities included in its
consolidated financial statements. Since that time, the Company through acquisition and development activities has increased the number of
self-storage facilities by 526 (1995 –152 facilities, 1996 – 201 facilities and 1997 –173 facilities). Self-storage rental income and cost of opera-
tions presented on the consolidated statements of income reflect the operations of all the 894 self-storage facilities owned by the Company and
the Consolidated Entities. For year to year comparisons, the following table summarizes the operating results (before depreciation) of those
facilities owned throughout each of the past three years and those acquired during the past three years:

Self-Storage Operations:

Year Ended December 31,

(Dollar amounts in thousands, except rents per square foot)

1997

1996

Percentage
Change

1996

1995

Percentage
Change

Rental income:

Consistent group
Post-1994 acquisitions

Cost of operations:
Consistent group
Post-1994 acquisitions

Net operating income:
Consistent group
Post-1994 acquisitions

$162,376
223,164

$153,566
116,863

385,540

270,429

49,392
68,571

117,963

112,984
154,593

47,317
35,177

82,494

106,249
81,686

$267,577

$187,935

Consistent group data:

Gross margin
Weighted average occupancy
Average realized annual rent per

occupied square foot

Average scheduled annual rent per square foot

Number of facilities (at the end of the period):

Consistent group
Cumulative post-1994 acquisitions

Net rentable square feet (at the end of the period):

Consistent group
Cumulative post-1994 acquisitions

69.6%
90.9%

$8.28
$8.76

368
526

21,662
31,909

69.2%
90.3%

$7.92
$8.04

368
353

21,662
21,755

5.7%
91.0%

42.6%

4.4%
94.9%

43.0%

6.3%
89.3%

42.4%

0.4%
0.6%

4.6%
9.0%

—
49.0%

—
46.7%

$153,566
116,863

$147,178
36,922

270,429

184,100

47,317
35,177

82,494

106,249
81,686

50,960
12,436

63,396

96,218
24,486

$187,935

$120,704

69.2%
90.3%

$7.92
$8.04

368
353

21,662
21,755

65.4%
89.3%

$7.68
$7.44

368
152

21,662
9,116

4.3%
216.5%

46.9%

(7.2)%
182.9%

30.1%

10.4%
233.6%

55.7%

3.8%
1.0%

3.1%
8.1%

—
132.2%

—
138.7%

For the consistent group of facilities owned throughout each of the three fiscal years, year-over-year improvements in rental income of
5.7% in 1997 and 4.3% in 1996 are the result of increased realized rent per square foot and increased weighted average occupancy levels, as
reflected in the table above. The Company believes that the improvement in each of these areas is due to (i) the national telephone reservation
system which was implemented during 1996 and the first part of 1997, (ii) increased rental rates put into effect during the second half of
1996, and (iii) media advertising implemented during the second half of 1997.

As indicated above, the Company implemented a national telephone reservation system to provide added customer service. Customers
calling either the Company’s toll-free telephone referral system, (800) 44-STORE, or a local Public Storage facility, are directed to the national
reservation system where a trained representative discusses with the customer space requirements, price and location preferences and also
informs the customer of other products and services provided by the Company and its subsidiaries.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

In the second half of 1996, the Company began to increase its scheduled rents charged to new customers (prior to promotional discounts)
and to existing tenants where warranted. As a result, for fiscal 1997, scheduled rents per square foot increased compared to 1996. In connection
with the national telephone reservation system, the Company experimented with pricing and promotional discounts designed to increase rental
activity. Accordingly, promotional discounts (which are included as a reduction to gross rents to arrive at rental income) increased significantly
from $303,000 in 1995 to $4,031,000 in 1996 and $14,244,000 in 1997. Despite the increased discounts, the Company’s facilities experienced
increased realized rents per square foot of 4.6% in 1997 compared to 1996 and 3.1% in 1996 compared to 1995.

With the exception of property management fees, most of the self-storage operating costs (i.e. payroll, property taxes, repairs and

maintenance, etc.) are generally fixed. As a result of becoming self-managed in connection with the PSMI Merger, the Company no longer
incurs property management fees. Cost of operations for 1996 decreased compared to 1995 principally as a result of the elimination of
property management fees for 1996. Included in cost of operations for 1995 were management fees totaling $9,421,000. However, offsetting
the decrease in property management fees in 1997 and 1996 are expenses with respect to the national telephone reservation system totaling
$3,875,000 and $1,257,000, respectively.

Development of self-storage facilities: Commencing in 1995, the Company began to construct self-storage facilities. Through December 31,
1997, the Company constructed and opened for operation seven facilities, one of which began operations in August 1995 (approximately
64,000 net rentable square feet), four in 1996 (approximately 244,000 net rentable square feet) and two in 1997 (approximately 118,000 net
rentable square feet). At December 31, 1997, the Company had four self-storage facilities (approximately 273,000 net rentable square feet)
under construction with an aggregate cost incurred to date of approximately $10.3 million and total additional estimated cost to complete
of $14.6 million. Generally, the construction period takes 9 to 12 months followed by an 18 to 24 month fill-up process until the newly
constructed facility reaches an stabilized occupancy level of approximately 90%.

In April 1997, the Company formed a joint venture partnership with a state pension fund to participate in the development of
approximately $220 million of self-storage facilities. The Company expects that substantially all of its development activities will be
conducted in the joint venture partnership until the $220 million is fully committed. At December 31, 1997, the joint venture partnership
had completed construction on seven self-storage facilities (approximately 412,000 net rentable square feet) with a total cost of
approximately $40.8 million, and had 17 facilities under construction (approximately 1,169,000 net rentable square feet) with an aggregate
cost incurred to date of approximately $48.9 million and total additional estimated cost to complete of $29.3 million. The partnership is
funded solely with equity capital consisting of 30% from the Company and 70% from the state pension fund. The Company accounts for its
investment in the joint venture partnership using the equity method. The following summarizes selected financial data of the development
joint venture partnership:

(In thousands)

Period from inception (April 10, 1997) to December 31, 1997

Rental income
Total revenues
Cost of operations
Depreciation
Net loss

At December 31, 1997

Construction in progress
Total assets
Total equity

$
952
$ 1,125
664
$
456
$
(22)
$

$48,888
$96,076
$91,184

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Commercial property operations: The Company’s commercial property operations represent approximately 9% of the Company’s operations
(based on total revenues generated during 1997). The commercial properties are generally composed of multi-tenant office/industrial space
and to a lesser extent suburban office. Commercial property rental income and cost of operations presented on the consolidated statements of
income reflect the operations of the 61 facilities owned by the Company and the Consolidated Entities. The following table summarizes the
operating results (before depreciation) of these facilities for each of the past three years:

Commercial Property Operations:

Year Ended December 31,

(Dollar amounts in thousands, except rents per square foot)

1997

1996

Percentage
Change

1996

1995

Percentage
Change

Rental income:

Consistent group
Post-1994 acquisitions

Cost of operations:
Consistent group
Post-1994 acquisitions

Net operating income:
Consistent group
Post-1994 acquisitions

Consistent group data:

Gross margin
Weighted average occupancy
Average realized annual rent per square foot
Number of facilities (at the end of the period):

Consistent group
Cumulative post-1994 acquisitions

Net rentable square feet (at the end of the period):

Consistent group
Cumulative post-1994 acquisitions

$17,723
22,852

40,575

8,018
8,647

16,665

9,705
14,205

$17,117
6,459

23,576

8,046
2,704

10,750

9,071
3,755

$23,910

$12,826

54.8%
95.5%
$ 9.12

53.0%
96.0%
$ 8.76

17
44

1,925
4,762

17
18

1,925
1,120

3.5%
253.8%

72.1%

(0.3)%
219.8%

55.0%

7.0%
278.3%

86.4%

3.6%
(0.5)%
4.1%

–

144.4%

–

325.2%

$17,117
6,459

23,576

8,046
2,704

10,750

9,071
3,755

$16,974
1,060

18,034

8,326
525

8,851

8,648
535

$12,826

$ 9,183

53.0%
96.0%
$ 8.76

51.0%
95.9%
$ 8.64

0.8%
509.3%

30.7%

(3.4)%
415.0%

21.5%

4.9%
601.9%

39.7%

2.0%
0.1%
1.4%

17
18

1,925
1,120

17
3

1,925
79

–

500.0%

–

1,317.7%

As indicated in the above table, the Company’s commercial property operations have grown principally as a result of the addition of new
properties over the past three years. The operating results of the consistent group of properties over the past three years has been improving,
with net operating income increasing principally due to improved realized rental rates and declining operating expenses.

As discussed above, effective March 31, 1998, the Company will no longer consolidate PSBP and the Operating Partnership. This will have
the effect of reducing commercial property revenue and cost of operations for those properties owned by PSBP and the Operating Partnership.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Equity in earnings of real estate entities: As of December 31, 1997, the Company had ownership interests in 29 affiliated limited partnerships
and two affiliated REITs which comprise the Unconsolidated Entities. The Company’s ownership interest in these entities is less than 50%. Due
to the Company’s limited ownership interest and control of these entities, the Company does not consolidate the accounts of these entities for
financial reporting purposes.

Equity in earnings of real estate entities represents the Company’s pro rata share of earnings of the Unconsolidated Entities using the equity

method. Similar to the Company, the Unconsolidated Entities generate substantially all of their income from their ownership of self-storage
facilities which are managed by the Company. In the aggregate, the Unconsolidated Entities own a total of 181 real estate facilities, 179 of
which are self-storage facilities. The following table summarizes the components of the Company’s equity in earnings of real estate entities:

(Amounts in thousands)
Self-storage operations (1)
Commercial property operations
Depreciation:

Self-storage facilities
Commercial properties
Other(2)

Year Ended December 31,

1997

$ 31,026
1,428

(10,935)
(539)
(3,411)

1996

$ 41,722
2,667

(15,709)
(1,741)
(4,818)

Dollar
Change

$(10,696)
(1,239)

4,774
1,202
1,407

1996

$ 41,722
2,667

(15,709)
(1,741)
(4,818)

1995

$ 6,573
269

(1,909)
(136)
(1,034)

Dollar
Change

$ 35,149
2,398

(13,800)
(1,605)
(3,784)

Total equity in earnings of real estate entities

$ 17,569

$ 22,121

$ (4,552)

$ 22,121

$ 3,763

$ 18,358

1.The fiscal 1997 amount includes the Company’s share of operations from the joint venture partnership performing development activities of $288,000.
2. Principally the Company’s pro rata share of general and administrative expense and interest expense.

The decrease in 1997 earnings compared to 1996 is principally the result of certain business combinations occurring in 1996 and 1997
whereby the Company’s existing ownership interest in certain entities were converted into wholly-owned real estate facilities (See Note 3 to
the consolidated financial statements).

The increase in earnings in 1996 compared to 1995 is due to (i) the 1996 earnings reflecting a full year’s operations for those interests
acquired in the PSMI Merger as opposed to just one and one-half months in 1995, (ii) the Company’s acquisition of additional interests
during 1996 in the Unconsolidated Entities which resulted in increased earnings from these entities (See Note 5 to the consolidated financial
statements) offset by (iii) certain business combinations occurring in 1996 whereby the Company’s existing ownership interest in certain
entities were converted into wholly-owned real estate facilities (See Note 3 to the consolidated financial statements).

The following table summarizes the combined operating data for fiscal 1997 (historical) with respect to those Unconsolidated Entities in

which the Company had an ownership interest as of December 31, 1997:

(In thousands)
Rental income
Total revenues
Cost of operations
Depreciation
Net income

$94,652
$96,650
$33,077
$12,805
$40,775

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Portable Self-Storage Operations

In August 1996, PSPUD, a subsidiary of the Company, made its initial entry into the portable self-storage business through its acquisition of a
single facility operator located in Irvine, California. In the latter part of the fourth quarter of 1996, PSPUD opened 3 facilities in the Los
Angeles market. During 1997, PSPUD opened a total of 45 facilities (9 facilities opened during the first quarter of 1997, 21 during the second
quarter, 9 during the third quarter, and 6 during the fourth quarter of fiscal 1997).

Due to the start-up nature of the business, PSPUD incurred operating losses totaling approximately $31.7 million and $826,000 for the

years ended December 31, 1997 and 1996, respectively, summarized as follows.

Portable Self-Storage:

(Dollar amounts in thousands)

Rental and other income

Cost of operations:

Direct operating costs
Marketing and advertising
Depreciation
General and administrative

Year Ended December 31,

1996

$ 421

1,022
19
32
174

1,247

Dollar
Change

$ 7,472

19,623
10,422
1,362
6,904

38,311

1997

$ 7,893

20,645
10,441
1,394
7,078

39,558

Operating losses

$(31,665)

$ (826)

$(30,839)

PSPUD’s facilities had a total of 36,000 occupied containers at December 31, 1997. Occupancy levels at the facilities varies significantly
depending on opening date, size of the facility and rental activity. Of the 49 facilities opened as of December 31, 1997, 32 facilities had been
opened in excess of seven months. The capacity of these 32 facilities ranges from 1,600 to 3,500 containers (averaging 2,140), and as of
December 31, 1997 these facilities had occupancy levels ranging from 17% to 97% (averaging 43%). As with mini-warehouses, PSPUD
believes that the portable self-storage business experiences some seasonal fluctuations in occupancy levels with occupancies generally higher
in the summer months than the winter months.

During 1997, PSPUD experimented with monthly container rental rates and transportation fees charged to customers. At December 31,
1997, monthly rental rates for the 32 facilities ranged from $45 to $69 per container per month. Transportation fees charged to customers
ranged from $19 to $49 for each of the move-in and move-out process. However, during 1997, PSPUD waived the move-in fee to customers.
PSPUD believes that marketing and advertising activities positively impact move-in activity. Commencing in the third quarter of 1997,
PSPUD began to advertise the portable self-storage product on television in selected markets. Customers are directed to call the national
reservation system where representatives discuss the customer’s storage needs and are able to schedule delivery of containers to customers’
locations. During 1997, approximately $9.2 million and $1.2 million was incurred in television and yellow pages advertising, respectively.
Marketing and advertising activities have not been consistently implemented in all markets. PSPUD believes there may be markets in which
its business will not be successful despite consistent marketing and advertising and is evaluating the advisability of continuing to operate
in certain markets.

Currently all of the PSPUD facilities are operated in buildings which are leased from third parties. A typical facility generally has

6 personnel (manager and truck drivers), 2 to 4 trucks, and a corresponding number of forklifts. Substantially all the equipment is leased.
Direct operating costs principally include payroll, facility and equipment (truck and forklift) lease expense.

During 1997, PSPUD incurred significant general and administrative costs related to recruiting and training personnel, equipment,

computer software and professional fees in organizing this business. PSPUD will continue to expend funds during 1998 in connection with
these activities. However, the amounts are expected to be less than in 1997.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

During 1998, PSPUD has opened an additional 5 facilities in markets where PSPUD facilities are currently operating. The number of new
store openings in 1998 is not determinable, however, future openings will predominantly be in existing markets in which PSPUD currently
operates. By opening in existing markets, PSPUD will seek to gain benefits from economies of scale. PSPUD is also developing 10 facilities
and has identified 5 additional sites for development. All of these development projects are located in existing markets with expected
opening dates commencing during the second half of 1998.

Until the PSPUD facilities are operating profitably, PSPUD’s operations are expected to continue to adversely impact the Company’s

earnings. PSPUD believes that its business is likely to be more successful in certain markets than in others. There can be no assurances as to
the level of PSPUD’s expansion, level of gross rentals, level of move-outs or profitability.

Property Management Operations

In connection with the PSMI Merger, the Company acquired property management contracts, exclusive of facilities owned by the Company,
for self-storage facilities and, through a subsidiary, the management contracts for commercial properties. These facilities constitute all of
the United States self-storage facilities and commercial properties doing business under the “Public Storage” name and all those in which the
Company has an interest. At December 31, 1997, the Company managed 1,107 self-storage facilities (1,073 owned by affiliates of the Company
and 34 owned by third parties) and the Operating Partnership managed 63 commercial properties, all of which are owned by the Company
or affiliates of the Company.

The property management contracts generally provide for compensation equal to 6%, in the case of the self-storage facilities, and 5%,

in the case of the commercial properties, of gross revenues of the facilities managed. Under the supervision of the property owners, the
Company coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activity,
and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Company assists and advises the
property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including
resident managers, assistant managers, relief managers and billing and maintenance personnel.

Property Management Operations:

Year Ended December 31,

(Amounts in thousands)

Facility management fees:

Self-storage
Commercial properties

Cost of operations:

Self-storage
Commercial properties

Net operating income:

Self-storage
Commercial properties

1997

1996

$ 9,706
435

10,141

1,449
344

1,793

8,257
91

$13,474
954

14,428

1,820
755

2,575

11,654
199

Dollar
Change

$(3,768)
(519)

(4,287)

(371)
(411)

(782)

(3,397)
(108)

$ 8,348

$11,853

$(3,505)

1996

1995

$13,474
954

14,428

1,820
755

2,575

11,654
199

$11,853

$1,976
168

2,144

264
88

352

1,712
80

$1,792

Dollar
Change

$11,498
786

12,284

1,556
667

2,223

9,942
119

$10,061

Because the Company has significant ownership interests in all but 34 of the facilities it manages, the revenues generated from its property
management operations are generally predictable and are dependent upon the future growth of rental income for those facilities the Company
manages. However, because the Company has acquired in the past, and may continue to seek to acquire in the future, real estate facilities
owned by the Unconsolidated Entities, the Company’s facility management income should decrease in 1998 compared to 1997. The acquisitions
of such facilities will reduce management fee income.

Effective March 31, 1998, the Company will no longer consolidate PSBP and the Operating Partnership, the commercial properties

manager. This will have the effect of eliminating commercial properties management fee income and cost of operations.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Other Income and Expense Items

Interest and other income: In an effort to attract a wider variety of customers, to further differentiate the Company from its competition
and to generate new sources of revenues, additional businesses are being developed through the Company’s subsidiaries that complement
the Company’s self-storage business. These products include the sale of locks, boxes and packing supplies and the rental of trucks and other
moving equipment through the implementation of a retail expansion program and truck rental program. The net results of these businesses
are presented along with interest and other income, as “interest and other income.” The components of interest and other income are detailed
as follows:

Year Ended December 31,

(In thousands)

1997

1996

Sales of packaging material and truck rental income:

Revenues
Costs of operation

Net operating income
Interest and other income

Total interest and other income

$5,272
4,134

1,138
7,988

$9,126

$3,083
2,171

912
7,064

$7,976

Dollar
Change

$2,189
1,963

226
924

$1,150

1996

1995

$3,083
2,171

912
7,064

$7,976

$ 112
100

12
4,497

$4,509

Dollar
Change

$2,971
2,071

900
2,567

$3,467

The strategic objective of the retail expansion program is to create a “Retail Store” that will (i) rent spaces for the attached self-storage
facility, (ii) rent spaces for the other Public Storage facilities in adjacent neighborhoods, (iii) sell locks, boxes and packing materials to the
general public, including tenants and (iv) rent trucks and other moving equipment, all in an environment that is more retail oriented. Retail
stores will be retrofitted to existing self-storage facility rental offices or “built-in” as part of the development of new self-storage facilities,
both in high traffic, high visibility locations.

Interest and other income is primarily attributable to interest income on cash balances and interest income from mortgage notes receivable.

Interest income from mortgage notes receivable was $2,938,000, $2,710,000 and $1,974,000 in 1997, 1996 and 1995, respectively. The
Company canceled mortgage notes receivable of approximately $700,000 in 1996 and $16,435,000 in 1995 in connection with the
acquisition of real estate facilities securing such notes. The Company also acquired notes receivable of $6,667,000 in the PSMI Merger in
1995 and an additional $12,355,000 and $3,709,000 in 1995 and 1996, respectively, from affiliated parties. The other increases in interest
income are primarily attributable to fluctuations in the level of invested cash balances which are caused by the timing of investing equity
offering proceeds in real estate assets.

Depreciation and amortization: Depreciation and amortization expense was $91,356,000 in 1997, $64,967,000 in 1996 and $40,760,000
in 1995. These increases are principally due to the acquisition of additional real estate facilities in each period; the increase from 1995 to 1996
also includes the effect of amortization of intangible assets acquired in connection with the PSMI Merger. Depreciation expense with respect
to the real estate facilities was $82,047,000 in 1997, $55,689,000 in 1996 and $39,376,000 in 1995; the increases are due to the acquisition
of additional real estate facilities in 1995 through 1997. Amortization expense with respect to intangible assets acquired in the PSMI Merger
totaled $9,309,000 in 1997, $9,309,000 in 1996 and $1,164,000 in 1995 (the 1995 amount representing a pro rated amount from November 16,
1995 through the end of the year).

General and administrative expense: General and administrative expense was $6,384,000 in 1997, $5,524,000 in 1996 and $3,982,000
in 1995. The Company has experienced and expects to continue to experience increased general and administrative costs due to the following:
(i) the growth in the size of the Company, (ii) the Company’s property acquisition activities have continued to expand, resulting in certain addi-
tional costs incurred in connection with the acquisition of additional real estate facilities, and (iii) pursuant to the PSMI Merger, the Company
became self-advised, resulting in the Company internalizing management functions which previously were provided by the Company’s
investment adviser. However, offsetting the increases in general and administrative expenses has been the elimination of advisory fee expense.
General and administrative costs for each year principally consist of state income taxes (for states in which the Company is a non-resident),
investor relation expenses, and certain overhead associated with the acquisition and development of real estate facilities.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Interest expense: Interest expense was $6,792,000 in 1997, $8,482,000 in 1996 and $8,508,000 in 1995. Reflecting the Company’s reluctance
to finance its growth with debt, debt and related interest expense remains relatively low compared to the Company’s overall asset base. The
Company capitalized interest expense of $2,428,000 in 1997, $1,861,000 in 1996 and $307,000 in 1995 in connection with the Company’s
development activities. Interest expense before the capitalization of interest was $9,220,000 in 1997, $10,343,000 in 1996 and $8,815,000
in 1995. The decrease in interest expense in 1997 compared to 1996, is principally due to the retirement of debt in 1997 of approximately
$11.9 million. The increase in interest expense in 1996 compared to 1995, is principally due to the assumption of a $65.5 million, 7.08%
unsecured senior note in connection with the PSMI Merger on November 16, 1995.

Environmental costs: The Company’s policy is to accrue environmental assessments and/or remediation cost when it is probable that such
efforts will be required and the related costs can reasonably be estimated. The majority of the Company’s real estate facilities were acquired prior
to the time when it was customary to conduct environmental assessments. During 1995, the Company and the Consolidated Entities con-
ducted independent environmental investigations of their real estate facilities. As a result of these investigations, the Company recorded an
amount which, in management’s best estimate, will be sufficient to satisfy anticipated costs of known remediation requirements. At December 31,
1995, the Company accrued $2,741,000 for estimated environmental remediation costs. Although there can be no assurance, the Company is
not aware of any environmental contamination of any of its facilities which individually or in the aggregate would be material to the Company’s
overall business, financial condition, or results of operations. The Company believes that amounts accrued in 1995 are sufficient to satisfy
anticipated costs.

Advisory fees: Advisory fees were $6,437,000 in 1995. The advisory fee, which was based on a contractual computation, increased as a
result of increased adjusted net income (as defined) per common share combined with the issuance of additional preferred and common stock
during each of the periods. Advisory fees for fiscal 1995 represent such amounts from the beginning of the year through November 16, 1995,
when the Company became self-advised pursuant to the PSMI Merger. As a result of becoming self-advised, the Company no longer incurs
advisory fees.

Minority interest in income: Minority interest in income represents the income allocable to equity interests in Consolidated Entities which are
not owned by the Company. Since 1990, the Company has acquired portions of these equity interests through its acquisition of limited and gen-
eral partnership interests in the Consolidated Entities. These acquisitions have resulted in reductions to the “Minority interest in income” from
what it would otherwise have been in the absence of such acquisitions, and accordingly, have increased the Company’s share of the Consoli-
dated Entities’ income. However, offsetting the reduction in minority interest in 1997 caused by the acquisition of additional equity interests
are the inclusion of additional partnerships in the Company’s consolidated financial statements as well as improved property operations.
During 1997, the Company acquired sufficient ownership interest and control in 12 partnerships and commenced including the accounts
of these partnerships in the Company’s consolidated financial statements which amounted to an increase in minority interest in income of
approximately $1,961,000 in 1997.

In determining income allocable to the minority interest for 1997, 1996 and 1995 consolidated depreciation and amortization expense of
approximately $9,245,000, $11,490,000 and $11,243,000, respectively, was allocated to the minority interest. The changes in depreciation
allocated to the minority interest was principally the result of the acquisition of limited partnership units in the Consolidated Entities by the
Company throughout fiscal 1995, 1996 and 1997 offset by an increase resulting from the above mentioned consolidation of partnerships.

Impact of Year 2000

The Company has completed an initial assessment of its computer systems. The majority of the computer programs were installed or
upgraded over the past few years and are Year 2000 compliant. Some of the older computer programs utilized by the Company were written
without regard for Year 2000 issues and could cause a system failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as part of the Company’s Year 2000 project.

The cost of the Year 2000 project will be allocated to all entities that use the Company computer systems. The cost of the Year 2000

project which is expected to be allocated to the Company is approximately $2.8 million. The cost of new software will be capitalized and the
cost of software maintenance will be expensed as incurred.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

The project is expected to be completed by March 31, 1999 which is prior to any anticipated impact on operating systems. The Company

believes that with modifications to existing software and, in some instances, the conversion to new software, the Year 2000 issue will not
pose significant operational problems. However, if such modifications are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.

The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on

management’s best estimates, which were derived utilizing numerous assumptions of future events. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those anticipated.

Supplemental Property Data and Trends

There are approximately 69 ownership entities owning in aggregate 1,073 self-storage facilities, including the facilities which the Company
owns and/or operates. At December 31, 1997, 179 of these facilities were owned by Unconsolidated Entities, entities in which the Company
has an ownership interest and uses the equity method for financial statement presentation. The remaining 894 facilities are owned by the
Company and Consolidated Entities, many of which were acquired through business combinations with affiliates during 1997, 1996 and 1995.
In order to evaluate how the Company’s overall portfolio has performed, management analyzes the operating performance of a consistent
group of self-storage facilities representing 951 (55.8 million net rentable square feet) of the 1,073 self-storage facilities (herein referred to as
“Same Store” self-storage facilities). The 951 facilities represents a consistent pool of properties which have been operated under the “Public
Storage” name, at a stabilized level, by the Company since January 1, 1993. The Same Store group of properties includes 780 consolidated
facilities (many of which were not included in the Company’s consolidated financial statements throughout each of the three years presented)
and 171 facilities owned by Unconsolidated Entities. The following table summarizes the pre-depreciation historical operating results of the
Same Store self-storage facilities:

Same Store Self-Storage Facilities:
(Historical property operations)

Year Ended December 31,

(Dollar amounts in thousands, except rent per square foot)

1997

1996

Rental income
Cost of operations(1)

Net operating income

$475,171
167,650

$307,521

$445,586
158,212

$287,374

Gross profit margin(3)
Weighted avg. occupancy
Weighted avg. realized annual rent per sq. ft.(2)
Weighted avg. scheduled annual rent per sq. ft.(2)

64.7%
91.8%
$9.24
$9.84

64.5%
91.2%
$8.76
$9.00

Percentage
Change

6.6%
6.0%

7.0%

0.2%
0.6%
5.5%
9.3%

1996

1995

$445,586
158,212

$287,374

$422,933
149,660

$273,273

64.5%
91.2%
$8.76
$9.00

64.6%
90.1%
$8.40
$8.16

Percentage
Change

5.4%
5.7%

5.2%

(0.1)%
1.1%
4.3%
10.3%

1. Assumes payment of property management fees on all facilities, including those facilities owned by the Company for which effective November 16, 1995 no

fee is paid. Cost of operations consists of the following:

Payroll expense
Property taxes
Property management fees
Advertising
Telephone center costs
Other(4)

1997

1996

1995

$ 44,233
44,476
28,490
4,859
4,506
41,086

$ 43,490
40,799
26,139
3,851
1,956
41,977

$ 42,545
38,325
25,391
3,502
–
39,897

$167,650

$158,212

$149,660

2. Realized rent per square foot as presented throughout this report represents the actual revenue earned per occupied square foot. Management believes this is

a more relevant measure than the scheduled rental rates, since scheduled rates can be discounted through the use of promotions.

3. Gross profit margin is computed by dividing property net operating income (before depreciation expense) by rental revenues. Cost of operations includes
a 6% management fee. The gross profit margin excluding the facility management fee was 70.7%, 70.5% and 70.6% in 1997, 1996 and 1995, respectively.
On November 16, 1995, the Company acquired its facility manager and no longer incurs such fees on the properties it owns.

4. Other expenses principally include utilities, repairs and maintenance, and other items such as office expenses.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

As indicated above, in early 1996, the Company implemented a national telephone reservation system designed to provide added

customer service for all the self-storage facilities under management by the Company. The Company believes that the improved operating
results, as indicated in the above table, in large part are due to the success of the national telephone reservation system. However, the
national telephone reservation system was not fully operational for most of the self-storage facilities until the latter part of the fourth quarter
of 1996.

Rental income for the Same Store facilities included promotional discounts totaling $16,708,000 in 1997 compared to $6,000,000 in

1996 and $729,000 in 1995, respectively. The significant increase in 1997 was principally due to experimentation with pricing and
promotional discounts designed to increase rental activity.

The self-storage facilities experience minor seasonal fluctuations in occupancy levels with occupancies generally higher in the summer months

than in the winter months. The Company believes that these fluctuations result in part from increased moving activities during the summer.

Same-Store Operating Trends by Region

Northern California

Southern California

Texas

Florida

Illinois

Other states

Total

% change
from prior
year

Amount

% change
from prior
year

Amount

% change
from prior
year

Amount

% change
from prior
year

Amount

% change
from prior
year

Amount

% change
from prior
year

Amount

% change
from prior
year

Amount

Rental Revenues:
1997 $71,406
65,222
1996
60,053
1995
Cost of operations
1997 $20,239
18,457
1996
17,856
1995

9.5% $85,944
79,524
8.6%
75,826
5.8%

8.1% $41,435
39,704
4.9%
39,191
3.6%

4.4% $29,248
27,908
1.3%
27,066
2.7%

4.8% $34,404 10.6% $212,734
9.0% 202,105
3.1%
7.6% 192,245
3.1%

31,123
28,552

5.3% $475,171
5.1% 445,586
5.4% 422,933

5.2% $17,239
9.7% $25,862
16,482
24,580
3.4%
5.7%
15,574
23,250 (1.6)%
3.4%

4.6% $11,638
10,772
5.8%
10,412
1.5%

8.2% $ 76,567
8.0% $16,105
73,034
14,887
3.5%
5.5%
68,453
14,115 16.9%
1.1%

3.5% $167,650
6.7% 158,212
3.5% 149,660

Net operating income:
1997 $51,167
1996
1995

46,765 10.8%
6.8%
42,197
Weighted avg. occupancy
96.1% 1.6%
94.5% 3.4%
91.1% 3.5%

1997
1996
1995

9.4% $60,082
54,944
52,576

9.4% $24,196
4.5%
6.1%

23,222 (1.7)%
3.5%
23,617

4.2% $17,610
17,136
16,654

2.8% $18,299 12.7% $136,167
16,236 12.5% 129,071
2.9%
14,437 (0.1)% 123,792
4.5%

5.5% $307,521
4.3% 287,374
6.5% 273,273

91.5% 4.2%
87.3% 2.1%
85.2% 2.4%

92.3% 2.7%
89.6% 1.2%
–
88.4%

90.6% 1.9%
88.7% 0.2%
88.5% (1.3)%

91.5% (1.3)%
92.8%
–
92.8% 2.0%

90.9% (1.3)%
92.2% 0.5%
91.7% 0.3%

91.8% 0.6%
91.2% 1.1%
90.1% 1.0%

Weighted avg. annual realized rents per sq. ft.
8.2%
4.9%
2.5%

$10.56
10.32
10.08

$11.04
10.20
9.72

1997
1996
1995

2.3%
2.4%
1.2%

$6.96
6.84
6.84

1.8%
–
1.8%

$8.28
8.04
7.80

3.0%
3.1%
4.8%

$9.84 10.8%
8.8%
4.6%

8.88
8.16

$9.00
8.40
8.04

7.1%
4.5%
4.7%

$9.24
8.76
8.40

5.5%
4.3%
2.9%

Liquidity and Capital Resources

The Company believes that its internally generated net cash provided by operating activities will continue to be sufficient to enable it to
meet its operating expenses, capital improvements, debt service requirements and distributions to shareholders for the foreseeable future.
Net cash provided by operating activities (as determined in accordance with generally accepted accounting principles) reflects the cash
generated from the Company’s business before distributions to various equity holders, including the preferred shareholders, capital
expenditures or mandatory principal payments on debt.

6.6%
5.4%
4.9%

6.0%
5.7%
3.4%

7.0%
5.2%
5.7%

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Operating as a real estate investment trust (“REIT”), the Company’s ability to retain cash flow for reinvestment is restricted. In order for
the Company to maintain its favored REIT status, a substantial portion of its operating cash flow must be used to make distributions to its
shareholders (see “REIT status” below). The following table summarizes the Company’s ability to pay the minority interests’ distributions, its
dividends to the preferred shareholders and capital improvements to maintain the facilities through the use of cash provided by operating
activities. The remaining cash flow generated is available to the Company to make both scheduled and optional principal payments on debt,
pay distributions to common shareholders and for reinvestment.

For the Year Ended December 31,

(In thousands)

Net income
Depreciation and amortization
Depreciation from Unconsolidated Entities
Minority interest in income
Environmental accrual

Net cash provided by operating activities

Distributions from operations to minority interests

Cash from operations allocable to the Company’s shareholders

Less: preferred stock dividends
Add: non-recurring payment of dividends with respect

to the Series CC convertible stock

Cash from operations available to common shareholders
Capital improvements to maintain facilities:

Self-storage facilities
Commercial properties

Add back: minority interest share of capital improvements to maintain facilities

Funds available for principal payments on debt, common dividends and reinvestment
Cash distributions to common shareholders

1997

$178,649
91,356
11,474
11,684
—

293,163
(20,929)

272,234
(88,393)

13,412

197,253

(30,834)
(4,283)
2,513

164,649
(86,181)

1996

$153,549
64,967
17,450
9,363
—

245,329
(20,853)

224,476
(68,599)

—

155,877

(15,957)
(4,409)
3,159

138,670
(67,709)

1995

$ 70,386
40,760
2,045
7,137
3,251

123,579
(18,380)

105,199
(31,124)

—

74,075

(8,509)
(2,852)
3,219

65,933
(38,586)

Funds available for principal payments on debt and reinvestment

$ 78,468

$ 70,961

$ 27,347

The fiscal 1997 funds available for principal payments on debt and reinvestment includes the start-up operating losses related to PSPUD’s

new portable self-storage business of $31.7 million. Management views such losses as part of the reinvestment of the Company’s internally
generated cash flows in PSPUD.

Distributions requirements: The Company’s conservative distribution policy has been the principal reason for the Company’s ability to retain
significant operating cash flows which have been used to make additional investments and debt reductions. During 1995, 1996 and 1997, the
Company distributed to common shareholders approximately 52%, 43% and 44% of its cash available from operations allocable to common
shareholders, respectively.

During 1997, the Company paid dividends totaling $68,534,000 to the holders of the Company’s Senior Preferred Stock, $4,531,000 to
the holders of the Convertible Preferred Stock, $15,328,000 to the holders of the Series CC Convertible Preferred Stock (which converted
to common stock during the second quarter of 1997) and $86,181,000 to the holders of Common Stock. Dividends with respect to the
Senior Preferred Stock include pro-rated amounts for securities issued during 1997. The Company estimates the distribution requirements
for fiscal 1998 with respect to Senior Preferred Stock and the Convertible Preferred Stock to be approximately $80.7 million. Distributions
with respect to the common stock will be determined based upon the Company’s REIT distribution requirements after taking into consideration
distributions to the Company’s preferred shareholders.

Capital improvement requirements: During 1998, the Company has budgeted approximately $27.4 million for capital improvements
($22.9 million for its self-storage facilities and $4.5 million for its commercial properties). The minority interests’ share of the budgeted capital
improvements is approximately $3.8 million.

During 1995, the Company commenced a program to enhance its visual icon and modernize the appearance of its self-storage facilities,
including modernization of signs, paint color schemes, and rental offices. Included in the 1998 capital improvement budget is approximately
$3.2 million with respect to these expenditures.

The significant increase in capital improvements in 1997 for the self-storage facilities (as reflected in the table above) is due to the acquisition

of new facilities in 1997.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Debt service requirements: The Company does not believe it has any significant refinancing risks with respect to its mortgage debt, all of which is
fixed rate. At December 31, 1997, the Company had total outstanding notes payable of approximately $96.6 million and $7 million outstanding
on the credit facility. See Note 7 to the consolidated financial statements for approximate principal maturities of such borrowings.

The Company uses its $150 million bank credit facility (all of which was unused as of March 27, 1998) primarily to fund acquisitions and

provide financial flexibility and liquidity. The credit facility currently bears interest at LIBOR plus 0.40% based on the Company’s current
financial ratios.

Growth strategies: During 1998, the Company intends to continue to expand its asset and capital base principally through the
(i) acquisition of real estate assets and interests in real estate assets from both unaffiliated and affiliated parties through direct purchases,
mergers, tender offers or other transactions, (ii) development of additional self-storage facilities and (iii) the expected expansion in the
operations of PSPUD’s portable self-storage business.

Mergers with affiliates: As indicated above, in March 1998, the Company’s private REIT merged with and into Properties 11, a publicly traded
real estate investment trust affiliated with the Company. In connection with the merger, the Company exchanged 11 wholly owned commercial
properties with the surviving corporation for 13 self-storage facilities. At December 31, 1997, the Company and the Consolidated Entities owned
approximately a 68% interest in the private REIT and the Operating Partnership on a combined basis and a 37% interest in Properties 11. Upon
completion of the merger, the Company and the Consolidated Entities own approximately 58% of the surviving corporation and the Operating
Partnership on a combined basis.

In February 1998, Public Storage Properties XX, Inc. (“Properties 20”) agreed, subject to certain conditions, to merge with and into the
Company. Properties 20 is an affiliated publicly traded equity REIT. The merger is conditioned on approval by the shareholders of Properties 20.
At December 31, 1997, the Company owned approximately 24% of Properties 20. The Company expects that, if approved by the shareholders,
the merger would be completed in the second quarter of 1998. Properties 20 is the last remaining affiliated REIT involved in the ownership
of self-storage facilities.

In addition to 533 wholly owned self-storage facilities, the Company operates, on behalf of approximately 64 ownership entities, 540 self-
storage facilities under the “Public Storage’’ name in which the Company has a partial equity interest. From time to time, some of these self-storage
facilities or interests in them are available for purchase, providing the Company with a source of additional acquisition opportunities.

Development of self-storage facilities: Commencing in 1995, the Company began to construct self-storage facilities. Since 1995, the Company
has opened a total of seven facilities, one in 1995, four in 1996, and two in 1997. The Company is evaluating the feasibility of developing
additional self-storage facilities in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the scarcity
of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities.

In April 1997, the Company formed a joint venture partnership with a state pension fund to participate in the development of approximately

$220 million of self-storage facilities. At December 31, 1997, the joint venture partnership had completed construction of seven self-storage
facilities (approximately 412,000 net rentable square feet) with a total cost of approximately $40.8 million, and had 17 facilities under
construction (approximately 1,169,000 net rentable square feet) with an aggregate cost incurred to date of approximately $48.9 million and total
additional estimated cost to complete of $29.3 million. The partnership is funded solely with equity capital consisting of 30% from the
Company and 70% from the state pension fund.

Portable self-storage business: As indicated above, in 1996 the Company organized PSPUD as a separate corporation to operate a portable self-
storage business that rents storage containers to customers for storage in central warehouses. As of December 31, 1997, PSPUD operated
a total of 49 facilities in 24 greater metropolitan areas in 16 states. In January and February 1998, PSPUD opened five additional facilities. PSPUD
has also identified an additional 15 sites in existing markets for development of PSPUD facilities at an aggregate estimated cost of $67.5 million.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Financing the Company’s growth strategies: The Company expects to fund its growth strategies with cash on hand at December 31, 1997,
internally generated retained cash flows and borrowings under its $150 million credit facility. The Company intends to repay amounts
borrowed under the credit facility from undistributed operating cash flow or, as market conditions permit and are determined to be advan-
tageous, from the public or private placement of equity securities.

The Company believes that its size and financial flexibility enables it to access capital for growth when appropriate. The Company’s
financial profile is characterized by a low level of debt to total capitalization, increasing net income, increasing cash flow from operations,
and a conservative dividend payout ratio with respect to the common stock. The Company’s credit ratings on its Senior Preferred Stock
by each of the three major credit agencies are Baa2 by Moody’s and BBB+ by Standard and Poor’s and Duff & Phelps.

The Company’s portfolio of real estate facilities remains substantially unencumbered. At December 31, 1997, the Company had mortgage

debt outstanding of $43.3 million and had consolidated real estate facilities with a book value of $2.7 billion. The Company has been
reluctant to finance its acquisitions with debt and generally will only increase its mortgage borrowing through the assumption of pre-existing
debt on acquired real estate facilities.

Over the past three years the Company has funded substantially all of its acquisitions with permanent capital (both common and
preferred stock). The Company has elected to use preferred stock despite the fact that the dividend rates of its preferred stock exceeds
current interest rates on conventional debt. The Company has chosen this method of financing for the following reasons: (i) the Company’s
perpetual preferred stock has no sinking fund requirement, or maturity date and does not require redemption, all of which eliminate any
future refinancing risks, (ii) preferred stock allows the Company to leverage the common stock without the attendant interest rate or
refinancing risks of debt, and (iii) like interest payments, dividends on the preferred stock can be applied to the Company’s REIT distributions
requirements, which have helped the Company to maintain a low common stock dividend payout ratio and retain cash flow.

Since January 1, 1998, the Company has issued an aggregate of approximately 6.4 million shares of common stock, raising net proceeds of
approximately $189 million. The Company intends to use the net proceeds from these offerings to make investments in real estate, primarily
self-storage, including mortgage loans and interest in real estate partnerships, to satisfy cash elections in connection with mergers with
affiliated REITs and to fund investments in PSPUD.

REIT status: The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under
the Internal Revenue Code of 1986, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to
qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders, provided
that at least 95% of its taxable income is so distributed prior to filing of the Company’s tax return. The Company has satisfied the REIT distrib-
ution requirement since 1980.

Funds from operations: Total funds from operations or “FFO” increased to $272,234,000 for the year ended December 31, 1997 compared
to $224,476,000 in 1996 and $105,199,000 in 1995. FFO available to common shareholders (after deducting preferred stock dividends)
increased to $197,253,000 for the year ended December 31, 1997 compared to $155,877,000 in 1996 and $74,075,000 in 1995. FFO means
net income (loss) (computed in accordance with generally accepted accounting principles) before (i) gain (loss) on early extinguishment of
debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization
(including the Company’s pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired
in the PSMI Merger, including property management agreements and goodwill), and (ii) less FFO attributable to minority interest.

FFO is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc.

(“NAREIT”). The NAREIT definition does not specifically address the treatment of minority interest in the determination of FFO or the
treatment of the amortization of property management agreements and goodwill. In the case of the Company, FFO represents amounts
attributable to its shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of
property management agreements and goodwill. FFO is presented because many industry analysts consider FFO to be one measure of the
performance of the Company and it is used in establishing the terms of the Class B Common Stock. FFO does not take into consideration
capital improvements, scheduled principal payments on debt, distributions and other obligations of the Company. Accordingly, FFO is not a
substitute for the Company’s cash flow or net income (as discussed above) as a measure of the Company’s liquidity or operating performance.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Common Stock Distribution Policy
and Stock Price

Public Storage, Inc. has paid continuous quarterly distributions to its shareholders since 1981, its first full year of operations. Distributions
paid per share of common stock for 1997 amount to $.88.

Holders of common stock are entitled to receive distributions when and if declared by the Company’s Board of Directors out of any
funds legally available for that purpose. The Company is required to distribute at least 95% of its net taxable ordinary income prior to the
filing of the Company’s tax return and 85%, subject to certain adjustments, during the calendar year, to maintain its REIT status for Federal
income tax purposes. It is management’s intention to pay distributions of not less than this required amount. For Federal tax purposes,
distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof, and for the past three
years distributions to common shareholders were as follows:

Year Ended

1997
1996
1995

Amount
Paid

$.88
.88
.88

Ordinary
Income

$.88
.88
.88

Capital Gain
Amount

Non-taxable
Return of Capital

$ —
—
—

The common stock has been listed on the New York Stock Exchange since October 19, 1984 and on the Pacific Exchange since

December 26, 1996. The ticker symbol is PSA.

The following table sets forth the high and low sales prices of the common stock on the New York Stock Exchange composite tapes for

the applicable periods.

Year

1996

1997

Quarter

1st
2nd
3rd
4th

Range

High

$21.875
21.500
22.625
31.375

$30.875
29.250
30.875
30.625

Low

$18.875
19.375
19.875
22.250

$26.500
25.875
27.000
26.125

As of March 2, 1998, there were approximately 23,716 holders of record of the common stock. The Company had approximately

111,723,882 common shares outstanding as of February 28, 1998.

P u b l i c S t o r a g e , I n c . 19 9 7 A n n u a l R e p o r t

Corporate Data

Public Storage, Inc. http://www.publicstorage.com

Directors
B. Wayne Hughes (1980)
Chairman of the Board and
Chief Executive Officer
Harvey Lenkin (1991)
President
B. Wayne Hughes, Jr. (1998)
Vice President-Acquisitions
Robert J. Abernethy (1980)
President, American Standard
Development Company and
Self-Storage Management Company
Dann V. Angeloff (1980)
President, The Angeloff Company
William C. Baker (1991)
Chairman and
Chief Executive Officer of
The Santa Anita Companies, Inc.
Thomas J. Barrack, Jr. (1998)
Chairman and Chief Executive
Officer of Colony Capital, Inc.
Uri P. Harkham (1993)
President and
Chief Executive Officer of the
Jonathan Martin Fashion Group

Executive Officers
B. Wayne Hughes
Chairman of the Board and
Chief Executive Officer
Harvey Lenkin
President
John Reyes
Senior Vice President and
Chief Financial Officer
Marvin M. Lotz
Senior Vice President
Carl B. Phelps
Senior Vice President
David Goldberg
Senior Vice President and
General Counsel
A. Timothy Scott
Senior Vice President and Tax Counsel
Obren B. Gerich
Senior Vice President
David P. Singelyn
Vice President and Treasurer
Sarah Hass
Vice President and Secretary

Date in parentheses indicates year director
was elected to the board.

Public Storage Pickup & Delivery, Inc.
B. Wayne Hughes
President
Alan Grossman
Senior Vice President
Steve Donovan
Vice President-Western Operations
Randy Weissman
Vice President-Eastern Operations

PS Business Parks, Inc.
Ronald L. Havner, Jr.
President and
Chief Executive Officer
Mary Jayne Howard
Executive Vice President
President-Operations Group
Mary Piper-Mutz
Vice President
Glenn Benoist
Vice President-Acquisitions
Brett Franklin
Vice President-Acquisitions

Other Corporate Officers
Bahman Abtahi
Senior Vice President,
Real Estate Division
Michael H. Appleby
Vice President-Development Manager
Samuel I. Ballard
Vice President
James F. Fitzpatrick
Vice President-Development Manager
Anthony Grillo
Vice President
Susan Gregory
Vice President
Tamara Hughes Gustavson
Vice President-Administration
Joanne A. Halliday
Vice President
Ronald L. Harden, Sr.
Vice President
Gregory S. Houge
Vice President
Brent C. Peterson
Vice President and
Chief Information Officer
W. David Ristig
Vice President-Acquisitions Manager
Jill L. Webster
Vice President and
Director of Taxation

Professional Services
Transfer Agent
Boston EquiServe
Boston, Massachusetts
http://www.EquiServe.com

Auditors
Ernst & Young LLP
Los Angeles, California

Shareholders may obtain, without
charge, a copy of Form 10-K, as filed
with the Securities and Exchange
Commission by addressing a written
request to the Investor Services
Department at the Corporate Head-
quarters.

Printed in USA:
Costello Brothers Lithographers,
Alhambra, California

Management Division
Marvin M. Lotz
President
Samuel I. Ballard
Senior Vice President
Anthony Grillo
Senior Vice President
Ronald L. Harden, Sr.
Senior Vice President
Gregory S. Houge
Senior Vice President
Brent C. Peterson
Senior Vice President
Wendy J. Adler
Vice President
Timothy C. Arthurs
Vice President
Ira J. Bailey
Vice President
Elizabeth Barista
Vice President
Kelly M. Barnes
Vice President
Jeffery A. Biesz
Vice President
Brad A. Boyd
Vice President
Stan M. Colona
Vice President
Jeff Dunlap
Vice President
Richard J. Gerner
Vice President
Les Guttman
Vice President
Joanne A. Halliday
General Counsel
Brad C. Helgeson
Vice President
Thomas Law
Vice President
Angus Goldie-Morrison
Vice President
Thomas O. Murphy
Vice President
Gary P. Ott
Vice President
Brian J. Ruthsatz
Vice President
John M. Sambuco
Vice President
James Stevens
Vice President
Emily J. Tufeld
Vice President
Christopher White
Vice President
Daniel M. Yoshihara
Vice President

Public Storage, Inc.
701 Western Avenue

Glendale, California 91201

(818) 244-8080

Address Correction Requested

www.publicstorage.com

Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit #366

satisfied customers NOW...and GROWING!

513-AR-98